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Hedging Affecting Firm Value via Financing and Investment: Evidence from Property Insurance Use

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  • Hong Zou

Abstract

"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." Copyright (c) 2010 Financial Management Association International.

Suggested Citation

  • Hong Zou, 2010. "Hedging Affecting Firm Value via Financing and Investment: Evidence from Property Insurance Use," Financial Management, Financial Management Association International, vol. 39(3), pages 965-996, September.
  • Handle: RePEc:bla:finmgt:v:39:y:2010:i:3:p:965-996
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    Cited by:

    1. Lin, Chen & Lin, Ping & Zou, Hong, 2012. "Does property rights protection affect corporate risk management strategy? Intra- and cross-country evidence," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 311-330.
    2. Cornaggia, Jess, 2013. "Does risk management matter? Evidence from the U.S. agricultural industry," Journal of Financial Economics, Elsevier, vol. 109(2), pages 419-440.
    3. Adams, Mike & Jiang, Wei, 2016. "Do outside directors influence the financial performance of risk-trading firms? Evidence from the United Kingdom (UK) insurance industry," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 36-51.
    4. Lee, Chien-Chiang & Lin, Chun-Wei & Zeng, Jhih-Hong, 2016. "Financial liberalization, insurance market, and the likelihood of financial crises," Journal of International Money and Finance, Elsevier, vol. 62(C), pages 25-51.
    5. Jiang, Wei & Adams, Mike & Jia-Upreti, Joy, 2012. "Does managerial entrenchment motivate the insurance decision?," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 117-128.
    6. Lin, Chen & Officer, Micah S. & Wang, Rui & Zou, Hong, 2013. "Directors' and officers' liability insurance and loan spreads," Journal of Financial Economics, Elsevier, vol. 110(1), pages 37-60.
    7. Kim, Huong Trang & Papanastassiou, Marina & Nguyen, Quang, 2017. "Multinationals and the impact of corruption on financial derivatives use and firm value: Evidence from East Asia," Journal of Multinational Financial Management, Elsevier, vol. 39(C), pages 39-59.

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