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Hedging, Contract Enforceability, and Competition

Author

Listed:
  • Erasmo Giambona
  • Anil Kumar
  • Gordon M Phillips

Abstract

We study how risk management through hedging affects 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 examine firms after a staggered state-level reform that reduces the costs of hedging by granting derivatives superpriority in case of insolvency. We show that firms that are likely to face costly external finance increase hedging and reduce risk and the probability of receivership. Firms that are likely to face costly external finance also lower prices, increase policy sales, and increase their market share post-reform.

Suggested Citation

  • Erasmo Giambona & Anil Kumar & Gordon M Phillips, 2025. "Hedging, Contract Enforceability, and Competition," The Review of Financial Studies, Society for Financial Studies, vol. 38(7), pages 2034-2087.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:7:p:2034-2087.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaf025
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    Keywords

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    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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