بازارهای سرمایه داخلی و تعدیل جزئی اهرم فشار

Prior literature provides support both for the existence of target capital structures and internal capital markets (ICM). The issue of whether firms use internal capital markets to reduce deviations from target capital structures, however, has yet to be examined. We provide the first empirical evidence of a link between deviations from target leverage and ICM activity. Based on data that allow us to trace intra-group capital market transactions for property–casualty insurers, our findings provide the first joint evidence that affiliated insurance companies have target leverage ratios and that ICM activity is used to manage deviations from target leverage.

The question of whether firms actively manage capital structure has been investigated since the proposition of the Modigliani and Miller irrelevance theorems in 1958. Subsequent research has examined whether firms actively manage the level of leverage given the costs and benefits of leverage, where support for active management is implied through evidence of a target capital structure (e.g., Flannery and Rangan, 2006, Huang and Ritter, 2009, De Haan and Kakes, 2010 and Cheng and Weiss, 2012). Prior literature also provides evidence that firms deviating from target capital structure may make partial adjustments toward the target rather than immediate adjustments due to adjustment costs (e.g., Hovakimian et al., 2001, Flannery and Rangan, 2006 and De Haan and Kakes, 2010). A second stream of literature1 explores the unique benefits of capital allocation within the group organizational structure. Specifically, this literature finds that conglomerates have the benefit of internal capital markets (ICMs), whereby the headquarters of the group has the ability to allocate capital across the various group members. The benefits of the internal allocation of capital include lower monitoring costs, reduced agency problems, greater efficiency of capital allocation and, ultimately, lower cost to obtain internal capital (compared to external capital). Given the potential for target capital structures and deviations from the target, one may expect that ICMs are used to reduce deviations from target capital structure – particularly if deviations from the target are costly (e.g., Flannery and Rangan, 2006). However, to our knowledge, this relation has not been examined empirically. While limited reporting requirements in most industries restrict the ability to test the relation between these two streams of literature, we contend that the property–casualty insurance industry provides a natural setting to test this relation for a number of reasons, including: (1) property–casualty insurance companies may have target capital structures (e.g., Cummins and Doherty, 2002, Cummins and Nini, 2002, Harrington and Niehaus, 2002, Klein et al., 2002, De Haan and Kakes, 2010, Shim, 2010 and Cheng and Weiss, 2012); (2) firms in the property–casualty insurance industry have the ability to operate in groups, which allows for an examination of ICM transactions (e.g., Powell and Sommer, 2007 and Powell et al., 2008); and (3) property–casualty insurers are required to prepare statutory filings that detail financial transactions between insurance group members (i.e., ICM transactions). We test for the existence of target capital structures in the property–casualty insurance industry using a partial adjustment model. Evidence of a target leverage ratio would suggest that insurers actively manage their capital structure. We then analyze ICM activity among affiliated insurers to determine if the extent of ICM activity (in particular affiliated reinsurance activity) is related to deviations from target capital structure. Our results indicate that insurers have target capital structures and that there is a statistical relation between deviations from target leverage and ICM activity. We make a number of contributions. First, we build upon the capital structure literature and provide further evidence of management actively adjusting toward a target. Second, given the availability of intra-group capital transfer data in the property–casualty insurance market, our examination of ICMs with respect to capital structure adjustments provides a greater understanding of the mechanisms used to reduce deviations from target capital structures. Most importantly, this is the first study to provide an empirical link between the existence of a target capital structure and how deviations from the target are related to capital flows among group members. The remainder of this paper is organized as follows. Section 2 discusses the prior literature’s examination of target leverage, the costs and benefits of leverage, and how firms may adjust leverage. Section 3 describes internal capital markets and both the costs and benefits associated with ICMs compared to their external counterparts. The primary hypotheses of interest are provided in Section 4. Section 5 discusses the data, methodology, and the variables employed in the study. A discussion regarding the results and implications is provided in Section 6, and Section 7 concludes.

Prior literature has not, to our knowledge, jointly examined the relation between deviations from target capital structure and internal capital market activity. Data from the property–casualty insurance industry allow us to conduct such an examination and we draw on recent empirical studies to examine the link between deviations from target capital structure and ICM activity. The results suggest that affiliated property–casualty insurers have target leverage ratios and that insurer use of internal capital markets varies depending on deviations from target leverage. We provide evidence that, in their purchases of reinsurance from affiliates via internal capital markets, over-leveraged insurers tend to purchase greater levels of reinsurance, effectively reducing leverage, while under-leveraged insurers tend to purchase less reinsurance. These findings indicate that insurers use ICMs in an effort to make partial adjustments toward target capital structure. The results of this study are important for two primary reasons. First, the results provide additional support for the existence of target capital structures in the property–casualty insurance industry. Prior literature has suggested that insurers may have target capital structures, even while they operate within a regulated industry, and these results support this hypothesis. Secondly, and most importantly, the results are the first to show a relation between deviations from target capital structure and ICM activity. Given that internal capital is less costly (and more easily obtainable) than external capital, one would anticipate that firms should use ICMs (as one source of capital) when making adjustments to capital structure. The findings provide a greater understanding of capital movements within groups and how group financial transactions potentially benefit the firm and various stakeholders.