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    Essays in Internal Capital Markets in the U.S. Property-Liability Insurance Industry

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    Genre
    Thesis/Dissertation
    Date
    2019
    Author
    Lim, Jiyun Lydia
    Advisor
    Weiss, Mary A.
    Committee member
    Cummins, J. David
    Chen, Hua
    Choi, Jongmoo Jay, 1945-
    Department
    Business Administration/Risk Management and Insurance
    Subject
    Business Administration
    Finance
    Economics
    Corporate Governance
    Efficiency
    Executive Compensation
    Internal Capital Markets
    Mergers and Acquisitions
    Property Liability Insurance
    Permanent link to this record
    http://hdl.handle.net/20.500.12613/3185
    
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    DOI
    http://dx.doi.org/10.34944/dspace/3167
    Abstract
    The first part of the dissertation examines whether M&As are related to internal capital markets by analyzing the changes in internal capital market utilization following M&As in the U.S. property-liability insurance industry during the period 2000-2015. The results suggest that both acquiring insurers and targets increase internal reinsurance and undergo more intragroup capital transactions after the M&A. The probit analysis provides evidence that insurers with low internal capital market utilization via reinsurance are more likely to engage in M&As as an acquirer or a target. This indicates that acquiring insurers with small internal capital markets have an incentive in making acquisitions to expand their internal capital markets. This study finds empirical evidence that internal capital market use is one of the determinants of M&As by utilizing internal transaction data of U.S. property-liability insurers. The second part of the dissertation investigates the relationship between executive compensation and internal capital market efficiency in the U.S. property-liability insurance industry for the period 2000-2015. The results indicate that executive compensation has a significant and positive influence on the efficiency of internal capital allocation. An executive’s incentive for efficient internal capital allocation is different depending on the type of compensation, the size of internal capital markets, and external events such as the global financial crisis. These findings are robust to corrections for potential endogeneity bias. I also find evidence of a non-linear relationship between efficiency and the size of internal capital markets. Internal capital markets should continue to expand as long as the benefit of relaxing credit constraints is greater than the cost of managing larger internal capital markets. Overall, the result of the study is consistent with the view that better alignment of executive incentives with shareholder interests leads to efficient internal capital allocation.
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