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Internal capital markets and the partial adjustment of leverage

Stephen G. Fier, Kathleen A. McCullough and James M. Carson

Journal of Banking & Finance, 2013, vol. 37, issue 3, 1029-1039

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 markets 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 insurers, our findings provide the first joint evidence that affiliated insurance companies have target leverage ratios and that ICM activity is used to manage deviations from target leverage.

Keywords: Internal capital markets; Leverage; Reinsurance (search for similar items in EconPapers)
JEL-codes: G22 G32 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:jbfina:v:37:y:2013:i:3:p:1029-1039