| Summary: | 博士 === 逢甲大學 === 商學研究所 === 97 === Hansen’s (1999) advanced panel threshold regression model will be used to test whether the marginal threshold value representing optimal (target) financial decision (ratio) exists respectively to the holding ratio of free cash flow, debt ratio and dividend payout ratio of the financial policy in the US life and property-casualty insurance industry.
This study has positively confirmed that optimal (target) financial policy does really exist. To US life insurance company, once holding ratio of free cash flow exceeds the threshold ratio of 0.3372, then 1% increase in holding ratio of free cash flow will lead to the decrease of return on equity of as high as 17 times. Once the holding ratio of free cash flow of US property-casualty insurance company is higher than 0.2301, then 1% increase in holding ratio of free cash flow will lead to the decrease in return on equity of as high as 13 times. The empirical result is consistent with that of Lai and Limpaphayom (2003), that is, the free cash flow can be well controlled, then the operation efficiency of the company might still be relatively high. What needs to be noticed more is once the free cash flow held exceeds the optimal (target) holding ratio, the negative influence of free cash flow on life insurance company will be 12 times its influence on property-casualty insurance company, which shows that the agency problem due to free cash flow as existed in US life insurance company is more serious than that existed in US property-casualty insurance company, and the empirical result is consistent with the performance of US life insurance industry in 2007 Financial Crisis.
The optimal (target) debt ratio regime of US life insurance company is larger than 0.1579 but smaller than 0.164. When the debt ratio of US life insurance company falls within that regime, then firm value will be increased by 4.8115% with an increase of 1% in debt ratio. Moreover, the optimal (target) debt ratio regime of US property-casualty insurance company is smaller than or equal to 0.031. When the debt ratio of US property-casualty insurance company falls within that regime, then firm value is increased by 1.7179% with an increase of 1% in debt ratio. The empirical result obviously does not support the “Capital Structure Irrelevance Theory” of Modigliani and Miller (1958) and the “The Pecking Order Theory” of Myers (1984) and Myers and Majluf (1984). However, it is consistent with the “The Trade-Off Theory” as proposed by Myers (1977).
The optimal (target) dividend payout ratio of US life insurance company is 0.1013. When dividend payout ratio is smaller than 0.1013, firm performance will be increased by 42.6329% with an increase of 1% in dividend payout ratio. Moreover, the optimal (target) dividend payout ratio of US property-casualty insurance company is 0.062. Once the dividend payout ratio is higher than 0.062, the influence of the issuance of dividend on firm performance will be changed from positive or less obvious influence to seriously and significantly negative influence. To the “Is there an optimal payout ratio or range of ratios that maximizes the firm value?” issue as proposed by Miller and Modigliani (1961), this article has obtained not only accurate and confirmative but also totally different answer.
Most of the US property-casualty insurance companies have relatively higher debt ratios. Meanwhile, more than 73% belongs to high-payout group, and more than 91% of company has holding ratio of free cash flow falling on relatively lower optimal (target) regime. In US life insurance industry, more than 68% of the company belongs to low-debt group, and company in low-payout group and high-payout group is half and half respectively. And then it can be seen that more than 80% of the company has holding ratio of free cash flow higher than the optimal (target) regime. This finding suggests that US insurance company can, based on optimal (target) ratio or optimal (target) ratio regime, increase appropriately debt raise and dividend issuance so as to adjust the free cash flow held to optimal holding ratio, and finally, to achieve the goals of enhancing firm performance and solving financial difficulty.
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