Essays in finance

“Essays in Finance,” a dissertation chaired by Professor Kose John, consists of two theoretical essays. Both consider corporate finance issues, and make use of insurance industry features. The insurance industry serves as an excellent laboratory in which to study issues of financial economics. Since both risk and leverage loom large in insurance, traditional corporate finance issues are prominent. Its status as a research area historically separate from finance means that the conditions and even stylized facts of the industry have not been considered when modeling corporate financial decisions. Considering existing models in light of their suitability for insurance yields insight into decisions of both insurance and non-insurance firms.; The first essay, “Viability of the Mutual Organizational Form,” offers the first comprehensive explanation of mutual viability. Customer owned mutual firms have long coexisted with stock firms in the financial sector. Relative to stock firms, mutual firms have higher expenses, lower risk, and larger size. Outside the financial sector, mutual firms are rare. The work jointly explains these facts via an equilibrium model of stock and mutual firms. The model features competitive markets for labor, equity, and product. The product price is an endogenous function of firm default risk. Managers make all decisions for mutual firms. Both managers and owners make decisions for stock firms. Liquidity and capital divisibility are established as relevant organizational form issues, alongside the traditionally considered agency concerns. Discussion includes applications to current demutualization phenomena.; The second essay, “Risk Incentives in Stock Property-Liability Insurance Companies,” considers the applicability of a corporate finance result to insurance firms. The conservative effect of a convex tax schedule holds for insurance firms, despite their differences from the typical levered firms of corporate finance. Important implications for insurance regulation are discussed.