The Capital Structure of Firms Subject to Price Regulation: Evidence from the Insurance Industry

Posted: 4 Jun 2003

See all articles by Robert W. Klein

Robert W. Klein

Georgia State University

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department

Wenyen Hsu

Feng Chia University - Department of Risk Management and Insurance

Multiple version iconThere are 2 versions of this paper

Abstract

Automobile and workers' compensation insurance are relatively homogeneous products sold under varying regulatory systems among the states. This paper investigates how price regulation affects the capital structure decisions of profit-maximizing insurers who sell insurance in both competitive and/or regulated markets. Specifically, we test the hypothesis that insurers subject to price regulation will choose to hold less capital. In addition, we hypothesize insurers subject to more stringent regulatory pricing constraints will choose even higher degrees of leverage because the benefits of holding additional amounts of capital are suppressed. We conduct empirical tests using cross-sectional data on insurers and find evidence consistent with both hypotheses. These findings have important implications for insurance price and solvency regulation. Stricter price regulation increases the default risk (i.e., reduces the financial quality) of insurance contracts purchased by individuals and firms.

Keywords: Insurance, price regulation, capital structure

Suggested Citation

Klein, Robert Warren and Phillips, Richard D. and Hsu, Wenyen, The Capital Structure of Firms Subject to Price Regulation: Evidence from the Insurance Industry. Journal of Financial Services Research, Vol. 21, No. 1 & 2, February/April 2002. Available at SSRN: https://ssrn.com/abstract=382901

Robert Warren Klein (Contact Author)

Georgia State University ( email )

5387 Northchester Ct
Atlanta, GA GA 30338
United States
404-386-1591 (Phone)

Richard D. Phillips

Georgia State University - Risk Management & Insurance Department ( email )

P.O. Box 4036
Atlanta, GA 30303
United States
404-413-7009 (Phone)

HOME PAGE: http://robinson.gsu.edu/profile/richard-d-phillips/

Wenyen Hsu

Feng Chia University - Department of Risk Management and Insurance ( email )

100 WenHwa Rd.
Talchung
Taiwan
04-2451-7250 ext 4107 (Phone)
04-2451-2176 (Fax)

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