Are Internal Capital Markets
            <i>Ex Post</i>
            Efficient?

Carson, James M.; Eastman, Evan; Eckles, David L.; Frederick, Joshua D.

doi:10.1080/10920277.2022.2126373

Cited by 1 publication

(2 citation statements)

References 55 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…However, while ICMs potentially offer benefits to diversified firms, inefficient allocation of resources can occur given the existence of a variety of agency problems that exist within the organization. Prior research has largely focused on whether internal capital allocations within conglomerates are efficient or inefficient, with mixed support for each (e.g., Carson et al, 2022; Lamont, 1997; Powell et al, 2008; Scharfstein, 1998; Scharfstein & Stein, 2000; Shin & Stulz, 1998).…”

Section: Discussionmentioning

confidence: 99%

“…The authors find that affiliated insurance companies do in fact have target capital structures and that internal reinsurance is employed for the purpose of adjusting to that target. Finally, Carson et al (2022) conduct an ex post analysis to determine whether the better performing firms which are allocated internal capital in the property‐casualty insurance industry (i.e., “winners”) continue to exhibit high underwriting performance in following years and find evidence supporting the notion that allocations are indeed efficient.…”

Section: The Use Of Icmsmentioning

confidence: 99%

See 1 more Smart Citation

Do insurers use internal capital markets to manage regulatory scrutiny risk?

Fier,

Liebenberg

2023

J of Risk & Insurance

View full text Add to dashboard Cite

Empirical evidence suggests that insurance groups allocate capital to members with better performance or growth prospects and use internal capital markets (ICMs) to protect the franchise value of less capitalized members. We propose and test an additional motivation for the use of ICMs—to manage regulatory scrutiny risk. We show that almost 50% of insurers at risk of facing additional regulatory scrutiny due to failing four Insurance Regulatory Information System (IRIS) ratios received sufficient internal capital to avoid enhanced regulation. Moreover, the likelihood and extent of internal capital allocation are related to regulatory scrutiny risk and the amount of capital allocated is typically just enough to avoid regulatory scrutiny. Time series evidence indicates that groups manage regulatory scrutiny risk by allocating capital toward affiliates when their pre‐capital contribution IRIS ratio failures exceed three, and away from affiliates when they are no longer at risk of additional regulatory scrutiny.

show abstract