Organizational Forms and Internal Capital Market: Evidence from the U.S. Property and Liability Insurance Industry

Abstract

We examine how organizational forms affect the performance of internal capital markets (ICMs), one of important activities in the business group setting. Specifically, we study the difference in the size and efficiency of ICMs between mutual and stock firms. We measure the size of ICMs using net reinsurance ceded to affiliated companies and evaluate the efficiency of ICMs by investigating the relationship between ICM transfers and investment in lines of high and low profitability. We find that mutual firms have smaller size of ICMs. Mutual firms’ ICMs have lower ability to facilitate investment in highly profitable lines of business. The evidence indicates the heterogeneity of ICM efficiency across different forms of organization in P&L insurance industry.