Price Regulation, Market Exit, and Financial Leverage of Canadian Property-Liability Insurers
AbstractThis 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 11212.
Date of creation: 26 Dec 2007
Date of revision: 28 Oct 2008
Price Regulation; Insurance; Financial Leverage; Capital Structure; Bankruptcy;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-11 (All new papers)
- NEP-IAS-2008-11-11 (Insurance Economics)
- NEP-REG-2008-11-11 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cummins, J. David & Lamm-Tennant, Joan, 1994. "Capital structure and the cost of equity capital in the property-liability insurance industry," Insurance: Mathematics and Economics, Elsevier, vol. 15(2-3), pages 187-201, December.
- Gron, Anne, 1994. "Evidence of Capacity Constraints in Insurance Markets," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 349-77, October.
- Dasgupta, Sudipto & Nanda, Vikram, 1993. "Bargaining and brinkmanship : Capital structure choice by regulated firms," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 475-497.
- 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 166-70, February.
- Robert Klein & Richard Phillips & Wenyan Shiu, 2002. "The Capital Structure of Firms Subject to Price Regulation: Evidence from the Insurance Industry," Journal of Financial Services Research, Springer, vol. 21(1), pages 79-100, February.
- 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 219-32, December.
- Doherty, Neil A & Schlesinger, Harris, 1990. "Rational Insurance Purchasing: Consideration of Contract Nonperformance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 243-53, February.
- Richard D. Phillips & J. David Cummins & Franklin Allen, 1996. "Financial Pricing of Insurance in the Multiple Line Insurance Company," Center for Financial Institutions Working Papers 96-09, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Taggart, Robert A, Jr, 1981. "Rate-of-Return Regulation and Utility Capital Structure Decisions," Journal of Finance, American Finance Association, vol. 36(2), pages 383-93, May.
- Anne Gron, 1994. "Capacity Constraints and Cycles in Property-Casualty Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 110-127, Spring.
- Joong, K.W. & mayers, D. & Smith, C.V., 1996. "On the Choice of Insurance Distribution Systems," The A. Gary Anderson Graduate School of Management 96-15, The A. Gary Anderson Graduate School of Management. University of California Riverside.
- Winter Ralph A., 1994. "The Dynamics of Competitive Insurance Markets," Journal of Financial Intermediation, Elsevier, vol. 3(4), pages 379-415, September.
- Winter, Ralph A, 1991. "Solvency Regulation and the Property-Liability "Insurance Cycle."," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 458-71, July.
- Cummins, J David & Mahul, Olivier, 2003. " Optimal Insurance with Divergent Beliefs about Insurer Total Default Risk," Journal of Risk and Uncertainty, Springer, vol. 27(2), pages 121-38, October.
- Barros, Pedro P, 1996. "Competition Effects of Price Liberalization in Insurance," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 267-87, September.
- Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. " On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-78, July.
- Harrington, Scott E & Danzon, Patricia M, 1994. "Price Cutting in Liability Insurance Markets," The Journal of Business, University of Chicago Press, vol. 67(4), pages 511-38, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.