Agency and Corporate Purchase of Insurance
BI - Norwegian Business School
Tel Aviv University - Faculty of Management; University of Utah - David Eccles School of Business
University of Iowa - Department of Finance
Consistent with the agency cost rational, this paper documents that managers having larger private benefits of control purchase more insurance to reduce their own exposure to the probability of left-tail outcomes and hence the volatility of the firm's cash flows. Private benefits of control are estimated by the market value of the right to vote (measured as the difference between the price of the stock and an equivalent synthetic stock that is constructed with options). Our results hold when we control for the probability of a control contest. We also find that firms with larger private benefits of control tend to use more debt.
Number of Pages in PDF File: 35
Keywords: private benefits of control, property insurance
JEL Classification: G22, G32, G33, G34, G35
Date posted: March 21, 2010 ; Last revised: April 15, 2013
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