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Hedging Affecting Firm Value via Financing and Investment: Evidence from Property Insurance Use
Author(s) -
Zou Hong
Publication year - 2010
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2010.01101.x
Subject(s) - property insurance , bond insurance , business , hedge , insurance policy , auto insurance risk selection , asset (computer security) , general insurance , actuarial science , debt financing , risk pool , investment (military) , enterprise value , finance , economics , debt , ecology , computer security , politics , computer science , political science , law , biology
I provide evidence about the value effects of alternative risk management by examining corporate purchase of property insurance, a commonly used pure hedge of asset‐loss risks. Using an insurance data set from China, I find that there is an inverted U‐shape effect of the extent of property insurance use on firm value measured by several versions of Tobin's Q. Therefore, the use of property insurance, to a certain degree, has a positive effect on firm value; however, over insurance appears detrimental to firm value. Given that the inflection points occur at relatively high levels of the observed insurance spending, insurance use appears beneficial to the majority of my sample firms. The estimated average hedging premium is about 1.5%. I demonstrate that an avenue for insurance to create value in China is that it helps firms secure valuable new debt financing and enhance investment.