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The Role of Internal Capital Markets in Financial Intermediaries: Evidence From Insurer Groups
Author(s) -
Powell Lawrence S.,
Sommer David W.,
Eckles David L.
Publication year - 2008
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2008.00267.x
Subject(s) - intermediary , exploit , business , transparency (behavior) , subsidiary , capital (architecture) , investment (military) , monetary economics , financial intermediary , capital allocation line , capital market , finance , economics , microeconomics , profit (economics) , computer security , archaeology , politics , computer science , political science , multinational corporation , law , history
We exploit the transparency of internal capital markets (ICMs) within insurance groups to investigate the activity and efficiency of ICMs within insurance groups. Specifically, we compare the relationship between internal capital transfers and investment to that between capital from other sources and investment. The ability to track the actual ICM transactions allows for more direct analysis of ICM activity than most previous studies. Consistent with theory, we find evidence that ICMs play a significant role in the investment behavior of affiliated insurers. We then use these detailed data to execute a more direct test of ICM efficiency than currently exists in the literature. Consistent with ICM efficiency, results suggest that capital is allocated to subsidiaries with the best expected performance.