Coinsurance and the Corporate Cost of Capital

71 Pages Posted: 6 Nov 2018 Last revised: 11 Apr 2019

See all articles by Michael Goedde-Menke

Michael Goedde-Menke

University of Münster - Finance Center Münster

Christian Rose

University of Münster - Accounting Center Münster

Date Written: April 10, 2019

Abstract

We empirically examine how coinsurance induced by diversification affects a firm’s cost of capital and its key determinants. Our newly developed coinsurance measure explicitly captures the default risk connectedness across a firm’s business segments and hence the very source of coinsurance. We find that firms with higher coinsurance display a lower cost of debt or higher leverage, with the chosen trade-off predictably varying with a firm’s financial constraint. Coinsured firms exhibit a higher cost of equity, except those with intermediate financial constraints. Overall, coinsurance relates to a lower cost of capital for the latter. Highly constrained firms face a markup.

Keywords: diversification, coinsurance, cost of capital, default risk connectedness, financial constraint

JEL Classification: G32, G33, L25

Suggested Citation

Goedde-Menke, Michael and Rose, Christian, Coinsurance and the Corporate Cost of Capital (April 10, 2019). 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

Christian Rose

University of Münster - Accounting Center Münster ( email )

Universitätsstraße 14-16
Münster, 48143
Germany

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