Internal Capital Markets and the Partial Adjustment of Leverage

46 Pages Posted: 26 May 2011 Last revised: 4 Oct 2012

See all articles by Stephen G. Fier

Stephen G. Fier

University of Mississippi - School of Business Administration

Kathleen A. McCullough

Florida State University - College of Business

James M. Carson

University of Georgia

Date Written: October 1, 2012

Abstract

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

Fier, Stephen G. and McCullough, Kathleen A. and Carson, James M., Internal Capital Markets and the Partial Adjustment of Leverage (October 1, 2012). FSU College of Law, Public Law Research Paper No. 506; FSU College of Law, Law, Business & Economics Paper No. 11-9. Available at SSRN: https://ssrn.com/abstract=1850488 or http://dx.doi.org/10.2139/ssrn.1850488

Stephen G. Fier

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

Kathleen A. McCullough

Florida State University - College of Business ( email )

Department of Risk Management and Insurance
150 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-8358 (Phone)
850-644-4077 (Fax)

James M. Carson (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

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