The benefits of downside risk reduction through coinsurance

IF 7.5 1区经济学 Q1 BUSINESS, FINANCE

International Review of Financial Analysis Pub Date : 2025-04-18 DOI:10.1016/j.irfa.2025.104265

Michael Goedde-Menke , Lars Norden , Christian Rose

{"title":"The benefits of downside risk reduction through coinsurance","authors":"Michael Goedde-Menke , Lars Norden , Christian Rose","doi":"10.1016/j.irfa.2025.104265","DOIUrl":null,"url":null,"abstract":"<div><div>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.</div><div>This version: March 25, 2025.</div></div>","PeriodicalId":48226,"journal":{"name":"International Review of Financial Analysis","volume":"104 ","pages":"Article 104265"},"PeriodicalIF":7.5000,"publicationDate":"2025-04-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"International Review of Financial Analysis","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1057521925003527","RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}

引用次数: 0

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.

This version: March 25, 2025.

查看原文本刊更多论文

通过共同保险降低下行风险的好处

我们研究了通过多部门公司共同保险降低下行风险的好处。使用基于行业违约风险联系的共同保险措施，源自单一部门公司的信用违约互换（CDS）价差变化，我们将下行风险降低的影响与多样化的上行潜力所带来的影响隔离开来。我们发现，与基于总风险代理的证据所显示的相比，多部门公司实现了更大的与债务相关的共同保险收益（更低的债务成本和/或更高的杠杆率）。共同保险对股东来说成本高昂，对WACC没有影响。共同保险对WACC和公司价值的影响因财务约束而有很大差异。当财务约束处于中等水平时，共同保险为债务持有人、股东和公司创造价值。解决了重要的识别问题。我们的研究结果揭示了多部门公司如何通过共同保险从降低下行风险中受益。这个版本：2025年3月25日。

本文章由计算机程序翻译，如有差异，请以英文原文为准。

求助全文

约1分钟内获得全文求助全文

来源期刊

International Review of Financial Analysis BUSINESS, FINANCE-

CiteScore

10.30

自引率

9.80%

发文量

366

期刊介绍： The International Review of Financial Analysis (IRFA) is an impartial refereed journal designed to serve as a platform for high-quality financial research. It welcomes a diverse range of financial research topics and maintains an unbiased selection process. While not limited to U.S.-centric subjects, IRFA, as its title suggests, is open to valuable research contributions from around the world.