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The firm's insurance decision. Some questions raised by the capital asset pricing model
Author(s) -
Main Brian G. M.
Publication year - 1982
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090030104
Subject(s) - business , financial distress , capital call , insurance policy , auto insurance risk selection , asset (computer security) , risk pool , general insurance , economics , purchasing , actuarial science , financial economics , microeconomics , economic capital , individual capital , financial system , profit (economics) , computer security , marketing , computer science
Using the capital asset pricing model it is shown that the firm will be indifferent towards insurance against specific risks. Insurance against systematic risks involves a transfer of these non‐diversifiable risks from the firm to the insurance company, and will thus only be available at a price which reflects the ‘market price of risk’. Again the firm will be indifferent towards insurance. This then leads to the investigation of alternative motivations for a firm purchasing insurance — the costs of financial distress, human capital considerations, asymmetry of information and tax laws.