How Does Financial Firm’s Diversification Affect Its Cost of Equity Capital: Evidence from the US P/L Insurance Market
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This study focuses on how insurers’ cost of equity capital can be affected by diversification type and its degree: product diversification, geographical diversification, and unrelated diversification. Overall, results show that insurers' cost of equity capital is not significantly related with product diversification and unrelated diversifications, rejecting hypotheses of the coinsurance effect, internal capital market, and agency costs whereas geographical diversification shows a significant and negative relationship with the cost of equity capital. In addition, firm type and concentration on personal business lines are found as significant factors which influence insurers' cost of capital. This study also provides interesting empirical evidence that the potential bias of the rate of return from infrequent trading becomes smaller when CAPM and FF3F betas are estimated, which is comparable to the study conducted by Cummins and Phillips (2005). This change implies that the financial market efficiency has improved.
Abstract
This study focuses on how insurers’ cost of equity capital can be affected by diversification type and its degree: product diversification, geographical diversification, and unrelated diversification. Overall, results show that insurers' cost of equity capital is not significantly related with product diversification and unrelated diversifications, rejecting hypotheses of the coinsurance effect, internal capital market, and agency costs whereas geographical diversification shows a significant and negative relationship with the cost of equity capital. In addition, firm type and concentration on personal business lines are found as significant factors which influence insurers' cost of capital. This study also provides interesting empirical evidence that the potential bias of the rate of return from infrequent trading becomes smaller when CAPM and FF3F betas are estimated, which is comparable to the study conducted by Cummins and Phillips (2005). This change implies that the financial market efficiency has improved.
참고문헌 (44)
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