Total views : 335

The Effect of Hedging with Property-Liability Insurance on the Probability of Financial Distress

Affiliations

  • Department of Business Administration, Cheongju University, Cheongju, Korea, Republic of

Abstract


Background/Objectives: This paper examines how hedging activities with property-liability insurance affect the likelihood of a firm's financial distress. To this end, this study employs a pooled Ordinary Least Squares (OLS) regression with a dependent variable, "distance-to-default". Methods/Statistical Analysis: This study proxies for a firm's hedging activities using the extent of property-liability insurance use. As robustness checks, this study re-estimates a regression equation using a dependent variable, Z-scores. This study further performs an analysis using the fixed effects panel regressions. Findings: This study finds that the extent of property-liability insurance use is positively related to proxies for the likelihood of financial distress, proxied as "distant-to-default" and Z-scores. The findings indicate that firms with a higher extent of property-liability insurance use are less likely to be subject to financial difficulties. Improvements: Overall, this study suggests that firms can lower the likelihood of their financial distress using hedging with propertyliability insurance.

Keywords

Financial Distress, Hedging, Property-Liability Insurance.

Full Text:

 |  (PDF views: 223)

References


  • Magee S. The effect of foreign currency hedging on the probability of financial distress. Accounting and Finance. 2013 Dec; 53(4):1107–27.
  • Nelson JM, Moffitt JS, Affleck-Graves J. The impact of hedging on the market value of equity. Journal of Corporate Finance. 2005 Oct ; 11(5):851–81.
  • Regan L, Hur Y. On the corporate demand for insurance: The case of Korean nonfinancial firms. Journal of Risk and Insurance. 2007 Dec; 74(4):829–50.
  • Adams MB, Hardwick P, Zou H. Reinsurance and corporate taxation in the United Kingdom life insurance industry. Journal of Banking and Finance. 2008 Jan; 32(1):101–15.
  • Modigliani F, Miller M. The cost of capital, corporate finance and the theory of investment. American Economic Review. 1958 Jun; 48(3):261–97.
  • Froot K, Scharfstein D, Stein J. Risk management: Coordinating investment and financing policies. Journal of Finance. 1993 Dec; 48:1629–58.
  • Leland HE. Agency costs, risk management, and capital structure. Journal of Finance. 1998 Aug; 53(4):1213–43.
  • Ross MP. Corporate hedging: What, why, and how? University of California, Berkeley: Working paper; 1997.
  • Smith CW, Stulz R. The determinants of firms hedging policies. Journal of Financial and Quantitative Analysis. 1985 Dec; 20(4):391–405.
  • Stulz RM. Rethinking risk management. Journal of Applied Corporate Finance. 1996; 9(3):8–25.
  • Mayers D, Smith CW. On the corporate demand for insurance. Journal of Business. 1982 Apr; 55(2):281–96.
  • Berkman H, Bradbury ME. Empirical evidence on the corporate use of derivatives. Financial Management. 1996 Jan; 25(2):5–13.
  • Gay GD, Nam J. The underinvestment problem and corporate derivatives use. Financial Management. 1998 Feb; 27(2):1–6.
  • Graham JR, Rogers DA. Do firms hedge in response to tax incentives? Journal of Finance. 2002 Apr; 57(2):815–39.
  • Knopf JD, Nam J, Thornton JH. The volatility and price sensitivities of managerial stock option portfolios and corporate hedging. Journal of Finance. 2002 Apr; 57(2):801–13.
  • Tufano P. Who manages risk? An empirical examination of risk management practices in the gold mining industry. Journal of Finance. 1996 Sep; 51(4):1097–137.
  • Merton RC. On the pricing of corporate debt the risk structure of interest rates. Journal of Finance. 1974 May; 29(2):449–70.
  • Altman EI. Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance. 1968 Sep; 23(4):589–609.
  • Campbell JY, Hilscher J, Szilagyi J. In search of distress risk. Journal of Finance. 2008 Nov; 63(6):2899–939.
  • Shumway T. Forecasting bankruptcy more accurately: A simple hazard model. Journal of Business. 2001 Jan; 74(1):101–24.

Refbacks

  • There are currently no refbacks.


Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.