Beyond the Average: Coinsurance Effects and Their Dependence on Financial Constraints

66 Pages Posted: 6 Nov 2018 Last revised: 13 Jan 2021

See all articles by Michael Goedde-Menke

Michael Goedde-Menke

University of Münster - Finance Center Münster

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE); Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Christian Rose

University of Münster - Accounting Center Münster

Date Written: January 11, 2021

Abstract

Coinsurance has differentiated effects that likely interact with financial constraints. We measure coinsurance of multi-segment firms using Granger causality between CDS spread-implied default risks of single-segment firms. Higher coinsurance results on average in lower cost of debt, higher leverage, higher cost of equity and unchanged WACC. Coinsurance lowers the cost of debt for financially unconstrained firms and increases leverage for constrained firms. Coinsurance lowers the cost of equity and the WACC only for intermediately constrained firms. Our findings indicate a wealth transfer from shareholders to debt holders and shed new light on the interplay of default risk and financial constraints.

Keywords: Default risk, corporate diversification, cost of capital, capital structure, credit default swaps

JEL Classification: G32, G33, L25

Suggested Citation

Goedde-Menke, Michael and Norden, Lars and Rose, Christian, Beyond the Average: Coinsurance Effects and Their Dependence on Financial Constraints (January 11, 2021). Available at SSRN: https://ssrn.com/abstract=3279554 or http://dx.doi.org/10.2139/ssrn.3279554

Michael Goedde-Menke (Contact Author)

University of Münster - Finance Center Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Christian Rose

University of Münster - Accounting Center Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

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