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Capital-based regulation, portfolio risk and capital determination: Empirical evidence from the US property-liability insurers

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  • Shim, Jeungbo

Abstract

This paper examines the impact of capital-based regulation on the insurer's risk and capital adjustments in the US property-liability insurance industry. We conduct the three-stage least squares (3SLS) procedure to estimate a simultaneous equations model. The key finding is that undercapitalized insurers increase capital to avoid regulatory costs and take more risks to generate higher returns. We also investigate firm characteristics that determine the insurer's capital structure. The results indicate that insurers appear to rely heavily on retained earnings to make up their capital shortage and insurers with greater growth opportunity may hold high levels of capital to control for agency problems. Robustness tests with an alternative risk measure and subsamples present consistent results.

Suggested Citation

  • Shim, Jeungbo, 2010. "Capital-based regulation, portfolio risk and capital determination: Empirical evidence from the US property-liability insurers," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2450-2461, October.
  • Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2450-2461
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fier, Stephen G. & McCullough, Kathleen A. & Carson, James M., 2013. "Internal capital markets and the partial adjustment of leverage," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1029-1039.
    2. Bülbül, Dilek & Lambert, Claudia, 2012. "Credit portfolio modelling and its effect on capital requirements," Discussion Papers 11/2012, Deutsche Bundesbank.
    3. repec:bla:jrinsu:v:84:y:2017:i:2:p:567-597 is not listed on IDEAS
    4. Jeungbo Shim, 2011. "Mergers & Acquisitions, Diversification and Performance in the U.S. Property-Liability Insurance Industry," Journal of Financial Services Research, Springer;Western Finance Association, vol. 39(3), pages 119-144, June.
    5. repec:bla:jrinsu:v:83:y:2016:i:4:p:1007-1043 is not listed on IDEAS
    6. Bijapur, Mohan & Croci, Manuela & Zaidi, Rida, 2012. "Do Asset Regulations Impede Portfolio Diversification? Evidence from European Life Insurance Funds," MPRA Paper 54265, University Library of Munich, Germany.
    7. Lee, Chien-Chiang & Hsieh, Meng-Fen, 2013. "The impact of bank capital on profitability and risk in Asian banking," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 251-281.
    8. repec:ipg:wpaper:2014-413 is not listed on IDEAS
    9. Selim Mankaï & Aymen Belgacem, 2013. "Interactions Between Risk-Taking, Capital, and Reinsurance for Property-Liability Insurance Firms," EconomiX Working Papers 2013-23, University of Paris Nanterre, EconomiX.
    10. Shim, Jeungbo, 2013. "Bank capital buffer and portfolio risk: The influence of business cycle and revenue diversification," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 761-772.

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