Agency and Corporate Purchase of Insurance

35 Pages Posted: 21 Mar 2010 Last revised: 15 Apr 2013

Paul Ehling

BI - Norwegian Business School

Avner Kalay

Tel Aviv University - Faculty of Management; University of Utah - David Eccles School of Business

Shagun Pant

University of Iowa - Department of Finance

Date Written: April 2013

Abstract

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.

Keywords: private benefits of control, property insurance

JEL Classification: G22, G32, G33, G34, G35

Suggested Citation

Ehling, Paul and Kalay, Avner and Pant, Shagun, Agency and Corporate Purchase of Insurance (April 2013). Available at SSRN: https://ssrn.com/abstract=1573059 or http://dx.doi.org/10.2139/ssrn.1573059

Paul Ehling (Contact Author)

BI - Norwegian Business School ( email )

N-0442 Oslo
Norway
+47 46410505 (Phone)

Avner Kalay

Tel Aviv University - Faculty of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
972 3 6406298 (Phone)
972 3 6406330 (Fax)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
801-581-5457 (Phone)

Shagun Pant

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

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