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Capital Structure in the Property-Liability Insurance Industry: Tests of the Tradeoff and Pecking Order Theories

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  • Jiang Cheng
  • Mary A. Weiss

Abstract

This study examines whether property-liability insurers have an optimum capital structure by testing the tradeoff and pecking order theories for this industry. Capital structure is measured with the net premiums written to surplus ratio, and alternatively, with the liability to asset ratio. The results indicate that the tradeoff theory dominates the pecking order theory in explaining property-liability insurer capital structure. Further, mutual and stock insurers appear to have different target capital structures, as agency theory suggests. Finally, mutual and stock insurers do not adjust at different speeds to their optimal capital structure.

Suggested Citation

  • Jiang Cheng & Mary A. Weiss, 2012. "Capital Structure in the Property-Liability Insurance Industry: Tests of the Tradeoff and Pecking Order Theories," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 35(1), pages 1-43.
  • Handle: RePEc:wri:journl:v:35:y:2012:i:1:p:1-43
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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. Ning Wang & Yiling Deng, 2016. "Market responses to loss shocks and insurers' post-catastrophe performance in the US property-casualty insurance market," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 11(3), pages 231-246.
    3. Catherine Bruneau & Nadia Sghaier, 2014. "Cyclicity in the French Property," Working Papers 2014-47, Department of Research, Ipag Business School.
    4. Altuntas, Muhammed & Berry-Stölzle, Thomas R. & Wende, Sabine, 2015. "Does one size fit all? Determinants of insurer capital structure around the globe," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 251-271.

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