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The impact of CEO inside debt on the coinsurance effect and excess value of diversification

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  • Salama, Feras M.
  • Samet, Anis

Abstract

The tenets of agency theory suggest that CEO inside debt holdings induce risk-reducing corporate investments. Further, the coinsurance hypothesis implies that diversification strategies designed to decrease cross-segment correlations reduce firm risk. Motivated by these views, we hypothesize a positive relationship between CEO inside debt holdings and the risk-reducing (e.g., coinsurance) effect of diversification. Moreover, we examine the impact of coinsurance, induced by CEO inside debt holdings, on the excess value of diversification. Using a sample of 4053 firm-year observations for the period of 2006–2013, we document a positive relationship between CEO inside debt and the extent of the coinsurance effect of diversification. In addition, consistent with the implications of the managerial risk aversion hypothesis that risk-reducing corporate diversification strategies destroy shareholder value, our results show that the coinsurance effect of diversification, when induced by CEO inside debt, negatively affects the excess value of diversification.

Suggested Citation

  • Salama, Feras M. & Samet, Anis, 2022. "The impact of CEO inside debt on the coinsurance effect and excess value of diversification," International Review of Economics & Finance, Elsevier, vol. 81(C), pages 58-74.
    • Handle: RePEc:eee:reveco:v:81:y:2022:i:c:p:58-74
    DOI: 10.1016/j.iref.2022.04.004
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    More about this item

    Keywords

    Corporate diversification; Compensation; Agency theory; Firm value;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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