Frederiek Schoubben

Is the Capital Structure Logic of Corporate Finance Applicable to Insurers? Review and Analysis

Since the financial crisis of 2008, next to banks, insurers have received increasing attention from researchers and regulators because of their crucial role in the financial system. A key point for a stable insurer is its capital structure, i.e. the choice between equity, debt and provisions in financing its operations. Based on earlier work a quickly developing literature has directly applied capital structure theories (in particular trade‐off and pecking order) from corporate finance to insurers’ financing choices. Corporate finance concepts used herein however, are developed for industrial firms. In this paper we provide an overview of the literature on the capital structure of insurers, but contribute by systematically clarifying how to account for the specificities of insurers when transferring the trade‐off and pecking‐order logic from an industrial to an insurer context. This way, we add several new insights on an insurers choice between equity, financial debt and provisions. In particular, we are able to explain why, as compared to industrial firms, insurers use less financial debt, and why insurers focus so strongly on self‐financing. Finally, we identify multiple avenues for future research.

The EU ETS and corporate environmental abatement

ABSTRACT This article studies the relationship between firm-level emissions-to-cap ratio (ETC) and environmental abatement, by using a unique and extensive data set of 10 762 installations covered by the European Union Emission Trading Scheme (EU ETS) matched to 5931 firms. We find that a shortage of emissions allowances is related to more abatement in later years while a surplus of emissions allowances results in worse subsequent environmental performance. This finding underscores the importance of reducing the global amount of allowances in the ETS system. Our results also suggest that stakeholder pressure and the creation of transparency concerning corporate environmental performance are likely to support the effectiveness of the system.