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Optimal Capital Structure for a Property-Liability Insurer

  • Stephen P D'Arcy


    (Mihaylo College of Business and Economics, California State University Fullerton, 800 North State College Blvd, SGMH-5113, Fullerton, CA 92834-6848, U.S.A.)

  • Teresa Lwin


    (Department of Finance, University of Chicago Booth School of Business, 5807 South Woodlawn Avenue, Chicago, IL 60637, U.S.A.)

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    Traditional finance studies have found that firm value is maximised at a mid-range level of leverage. This paper empirically tests the effect of leverage on firm value for property-liability insurers. We analysed an international data set of 96 insurers from 1992 to 2006 using two measures for firm value (price-to-earnings and market-to-book) and three measures of leverage (liabilities-to-equity, premiums-to-equity and surplus duration). We found that price-to-earnings at first increases with leverage, as measured by liabilities-to-equity and premiums-to-equity, but decreases past a certain point. Market-to-book exhibited a similar pattern for the premium-to-equity ratio but had a positive relationship with liabilities-to-equity and a negative relationship with surplus duration.

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    Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Issues and Practice.

    Volume (Year): 37 (2012)
    Issue (Month): 3 (July)
    Pages: 509-538

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    Handle: RePEc:pal:gpprii:v:37:y:2012:i:3:p:509-538
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