Price Regulation, Market Exit, and Financial Leverage of Canadian Property-Liability Insurers

Jason Strauss

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates strategic brinksmanship between regulated property-liability insurance firms and their regulators. Prior research suggests that firms increase their financial leverage, and thus their probability of bankruptcy and expected bankruptcy costs, in order to mitigate the severity of binding price ceilings. Although financial leverage can be altered by changing capital structure, it can also be altered by increasing other liabilities, as analyzed in this paper. This paper uses an instrumental variable for price regulation with a maximum-likelihood Heckman estimation method over panel data for Canadian property-liability insurers to extract the impact that price regulation has on the financial leverage of insurers as well as the probability of bankruptcy, the non-selection probability.

Keywords: Price Regulation; Insurance; Financial Leverage; Capital Structure; Bankruptcy (search for similar items in EconPapers)
JEL-codes: G22 G32 G33 (search for similar items in EconPapers)
Date: 2007-12-26, Revised 2008-10-28
New Economics Papers: this item is included in nep-ias and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:11212

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