Corporate Insurance and Managers' and Owners' Risk Aversion

Abstract:     
Using corporate property insurance contracts of small and medium-sized private firms, I document negative relations between various ownership measures --- CEO salary, ownership concentration and aggregate female ownership --- and insurance use as well as a positive relation between the number of family owners and insurance use. None of these relations seem consistent with the risk aversion motive to insure or to hedge. Next, I show that changes in insurance premium and lagged changes in earnings are positively related, consistent with the view that insurers raise premium after firms' earnings soar. If mangers and owners with significant stakes reduce coverage at the margin or relative to the average firm to counteract rent extraction by brokers or insurers, then the positive association between changes in earnings and changes in premium might help explain why proxies for managers' and owners' risk aversion show negative instead of positive relation with property insurance. Further, I provide evidence of strong causal relations between insurance, leverage and cash. Specifically, insurance and cash are risk management complements since insurance use exerts a positive influence on corporate cash holdings and cash exerts a positive influence on insurance use.

Number of Pages in PDF File: 38

Keywords: Cash, Corporate Risk Management, Leverage, Managers' and Owners' Risk Aversion, Private Firms, Property Insurance

JEL Classification: G22, G32, G33, G35

working papers series