The Role of Internal Capital Markets in Financial Intermediaries: Evidence From Insurer Groups |
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| Authors: | Lawrence S Powell ; David W Sommer† ; David L Eckles‡ |
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| Institution: | Lawrence S. Powell is an assistant professor at the College of Business, University of Arkansas, Little Rock, AK;. David W. Sommer is a professor at the Bill Greehey School of Business, St. Mary's University;. David L. Eckles is an assistant professor at the Terry College of Business, University of Georgia. |
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| Abstract: | 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. |
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