Hedging and Competition

79 Pages Posted: 16 Mar 2021 Last revised: 19 Apr 2021

See all articles by Erasmo Giambona

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

Anil Kumar

Aarhus University, Department of Economics & Business Economics; Danish Finance Institute

Gordon M. Phillips

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: April 10, 2021

Abstract

We study how risk management through hedging impacts firms and competition among firms in the life insurance industry - an industry with over 7 Trillion in assets and over 1,000 private and public firms. We show that firms that are likely to face costly external finance increase hedging after staggered state-level financial reform that reduces the costs of hedging. After hedging, these firms have lower risk and fewer negative income shocks. Post market reform, product market competition is also impacted. Firms that are previously more likely to face costly external finance, lower price, increase policy sales and market share relative to unaffected companies. The results are consistent with hedging allowing firms that face potential costly financial distress to decrease risk and become more competitive.

Keywords: Competition, risk management, hedging, financial stability, policy sales (life insurance and annuities), policy prices, market share, market leadership, derivatives superpriority

JEL Classification: D02, D22, D43, G22, G28, G31, G32, G33

Suggested Citation

Giambona, Erasmo and Kumar, Anil and Phillips, Gordon M., Hedging and Competition (April 10, 2021). Available at SSRN: https://ssrn.com/abstract=3802342 or http://dx.doi.org/10.2139/ssrn.3802342

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
RM 640
Syracuse, NY 13244-2450
United States
315 443-4885 (Phone)

Anil Kumar

Aarhus University, Department of Economics & Business Economics ( email )

Fuglesangs Alle 4
Aarhus V, 8210
Denmark

Danish Finance Institute ( email )

Gordon M. Phillips (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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