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Price Regulation, Market Exit, and Financial Leverage of Canadian Property-Liability Insurers

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  • Strauss, Jason

Abstract

This paper investigates strategic brinksmanship between regulated property-liability insurance firms and their regulators. Prior research suggests that firms increase their financial leverage, and thus their probability of bankruptcy and expected bankruptcy costs, in order to mitigate the severity of binding price ceilings. Although financial leverage can be altered by changing capital structure, it can also be altered by increasing other liabilities, as analyzed in this paper. This paper uses an instrumental variable for price regulation with a maximum-likelihood Heckman estimation method over panel data for Canadian property-liability insurers to extract the impact that price regulation has on the financial leverage of insurers as well as the probability of bankruptcy, the non-selection probability.

Suggested Citation

  • Strauss, Jason, 2007. "Price Regulation, Market Exit, and Financial Leverage of Canadian Property-Liability Insurers," MPRA Paper 11212, University Library of Munich, Germany, revised 28 Oct 2008.
  • Handle: RePEc:pra:mprapa:11212
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    References listed on IDEAS

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    5. Harrington, Scott E, 1987. "A Note on the Impact of Auto Insurance Rate Regulation," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 166-170, February.
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    7. Yossef Spiegel & Daniel F. Spulber, 1994. "The Capital Structure of a Regulated Firm," RAND Journal of Economics, The RAND Corporation, vol. 25(3), pages 424-440, Autumn.
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    17. Cagle, Julie A B & Harrington, Scott E, 1995. "Insurance Supply with Capacity Constraints and Endogenous Insolvency Risk," Journal of Risk and Uncertainty, Springer, vol. 11(3), pages 219-232, December.
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    More about this item

    Keywords

    Price Regulation; Insurance; Financial Leverage; Capital Structure; Bankruptcy;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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