Working Paper: NBER ID: w29207
Authors: Erasmo Giambona; Anil Kumar; Gordon M. Phillips
Abstract: We study how risk management through hedging impacts firms and competition among firms in the life insurance industry - an industry with over 7 Trillion in assets and over 1,000 private and public firms. We show that firms that are likely to face costly external finance increase hedging after staggered state-level financial reform that reduces the costs of hedging. Post reform impacted firms have lower risk and fewer negative income shocks. Product market competition is also impacted. Firms that previously are more likely to face costly external finance, lower price, increase policy sales and increase their market share post reform. The results are consistent with hedging allowing firms that face potential costly financial distress to decrease risk and become more competitive.
Keywords: No keywords provided
JEL Codes: D0; D22; D43; G22; G28; G31; G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial reform (G28) | increase in hedging practices among life insurers (G52) |
| increase in hedging practices among life insurers (G52) | lower risk and fewer negative income shocks (G52) |
| increase in hedging practices among life insurers (G52) | increase in product market competition (L19) |
| lower risk and fewer negative income shocks (G52) | decrease in average policy prices (G52) |
| financial reform (G28) | lower risk and fewer negative income shocks (G52) |
| financial reform (G28) | increase in product market competition (L19) |