Beyond the Average: Coinsurance Effects and Financial Constraints

66 Pages Posted: 6 Nov 2018 Last revised: 28 Oct 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: October 28, 2021

Abstract

We investigate the differential effects of coinsurance arising from corporate diversification. Measuring coinsurance of multi-segment firms with CDS spread-implied default risks of single-segment firms, we disentangle the effects for debt- and shareholders by level of financial constraints and contrast them with the upside potential of diversification. Coinsurance effects -lower cost of debt or higher leverage- and their value impact vary monotonically with financial constraints. Coinsurance lowers the cost of equity and the WACC only for moderately constrained firms. Important identification issues are addressed. Coinsurance creates financial flexibility that diversified firms take advantage of according to their level of financial constraints.

Keywords: Corporate diversification, default risk, financial flexibility, cost of capital, capital structure

JEL Classification: G32, G33, L25

Suggested Citation

Goedde-Menke, Michael and Norden, Lars and Rose, Christian, Beyond the Average: Coinsurance Effects and Financial Constraints (October 28, 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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