Hedging, Contract Enforceability and Competition
121 Pages Posted: 16 Mar 2021 Last revised: 14 Dec 2023
There are 2 versions of this paper
Hedging, Contract Enforceability and Competition
Hedging and Competition
Date Written: October 14, 2021
Abstract
We study how risk management through hedging impacts 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.
Keywords: Competition, risk management, hedging, financial stability, policy sales (life insurance and annuities), policy prices, market share, market leadership, derivatives superpriority
JEL Classification: D02, D22, D43, G22, G28, G31, G32, G33
Suggested Citation: Suggested Citation