Balance sheet structure and the managerial-discretion hypothesis: an exploratory empirical study of New Zealand life insurance companies

Article Abstract:

The managerial-discretion hypothesis states that in mutual insurance companies policyholders will seek to protect their interests by limiting managerial discretion in investment and financing decisions. Therefore, mutuals are predicted to introduce restrictive mechanisms (e.g., company by-laws) that promote precautionary investment, such as government securities. In stock companies, shareholders are expected to increase their wealth at the expense of policyholders' interests by investing in more speculative assets, such as equities. Differences in investment activity also affect policy valuation and reserving decisions reflected in the liability side of the insurance company balance sheet. The managerial-discretion hypothesis implies that systematic differences in the structure of balance sheets between mutual and stock insurance companies are likely to exist. To carry out an exploratory test of this aspect of the managerial-discretion hypothesis, the present study employs canonical correlation analysis on New Zealand life insurance company data for 1991. However, the empirical evidence does not appear to support the proposition that balance sheet structure varies systematically between mutual and stock companies. (Reprinted by permission of the publisher.)

Insurance industry, Life insurance industry, New Zealand, Financial statements, Corporations, New Zealand

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An applied IRR model for a levered project in the presence of inflation

Article Abstract:

An inflation-adjusted IRR model for the appraisal of levered projects is developed within the supply side studies framework by using the tax approach. An empirical test of the model on industrial projects has indicated that the general pattern of the project rankings was not significantly affected in the presence of inflation. However, the shifts in the ranks of the individual projects and over-and-under biases in the traditional accept decisions are observed. Further, all the projects have shown a magnified impact of financial leverage on the IRRs. (Reprinted by permission of the publisher.)

Accounting, auditing, & bookkeeping, Models, Analysis, Finance, Inflation (Finance), Tax research, Corporate finance, Supply-side economics, Inflation (Economics)

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