Internal Capital Markets and the Partial Adjustment of Leverage
46 Pages Posted: 26 May 2011 Last revised: 4 Oct 2012
Date Written: October 1, 2012
Prior literature provides support both for the existence of target capital structures and internal capital markets (ICM). The issue of whether firms use internal capital to reduce deviations from target capital structures, however, has yet to be examined. We provide the first empirical evidence of a link between deviations from target leverage and ICM activity. Based on data that allow us to trace intra-group capital market transactions for property-casualty insurer groups, our findings provide the first joint evidence that affiliated insurance companies have target leverage ratios and that ICM activity is related to deviations from target leverage.
Keywords: internal capital markets, leverage, reinsurance
JEL Classification: G22, G32
Suggested Citation: Suggested Citation