The Benefits of Downside Risk Reduction Through Coinsurance

69 Pages Posted: 6 Nov 2018 Last revised: 9 Dec 2024

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: December 09, 2024

Abstract

We investigate the benefits of downside risk reduction through coinsurance in multi-segment firms. Using a coinsurance measure based on industry default risk connections derived from credit default swap (CDS) spread changes of single-segment firms, we isolate the effects of downside risk reduction from those due to the upside potential of diversification. We find multi-segment firms realize significantly larger debt-related coinsurance benefits (lower cost of debt and/or higher leverage) than suggested by evidence based on total risk proxies. Coinsurance is costly for shareholders and has no effect on the WACC. The impact of coinsurance on the WACC and firm value strongly varies with financial constraints. When financial constraints are at intermediate levels, coinsurance creates value for debt holders, shareholders, and the firm. Important identification issues are addressed. Our findings shed new light on how multi-segment firms benefit from downside risk reduction through coinsurance.

Keywords: Default risk, credit default swaps, cost of capital, multi-segment firms, diversification

JEL Classification: G32, G33, L25

Suggested Citation

Goedde-Menke, Michael and Norden, Lars and Rose, Christian, The Benefits of Downside Risk Reduction Through Coinsurance (December 09, 2024). 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
267
Abstract Views
2,369
Rank
240,217
PlumX Metrics