Financial policies on firm performance: The U.S. insurance industry before and after the global financial crisis

a r t i c l e i n f o In this study, the advanced panel threshold regression model was used to test whether a marginal threshold value representing optimal financial decisions exists respective to the holding ratio of free cash flow, the debt ratio, and the dividend payout ratio determined by the U.S. life and property–casualty insurance industry. The results indicated that an optimal financial policy exists. The findings suggest that the U.S. insurance industry can appropriately increase debt raise based on the optimal ratio, increasing dividend issuance to adjust the free cash flow restricted to the optimal holding ratio, and thus, enhance firm performance and solve financial problems. In 2007, a financial crisis severely affected the global economy. Financial upheaval within the U.S. insurance industry attracted international attention and caused mass panic, resulting in an overall lack of confidence in company performance by U.S. citizens and decreased financial strength ratings given by numerous rating agencies to U.S. insurance enterprises. The financial crisis indicated that the financial policies of U.S. insurance industries that affected firm performance caused long-term problems. This study was inspired by the status of corporate financial matters that attracted international attention, and investigated the relationship between financial policy and firm performance in the U.S. insurance industry. The financial ratio in the corporate finance academic, which is most frequently used to discuss corporate capital structure, includes the holding ratio of free cash flow, the debt ratio, and the dividend payout ratio. In addition, whether optimal financial decisions can maximize firm performance was determined. In this study, the advanced panel threshold regression model developed by Hansen (1999) was applied to test whether the marginal threshold value representing optimal financial decisions exists respective to the holding ratio of free cash flow, the debt ratio, and the dividend payout ratio determined by the financial policy in the U.S. life and property– casualty insurance industry. The influence that financial policy exerts on the firm performance of enterprises in the U.S. insurance industry was investigated in three parts: In the first part, the influence that free cash flow exerts on firm performance was analyzed. Jensen (1986) proposed the free cash flow hypothesis to define free cash flow as cash exceeding the amount required to fund positive net present value projects. In addition, he claimed that the existence of free cash flow causes managers to use capital inefficiently for unprofitable investment projects; …