Risk management and corporate lifecycles: Evidence from reinsurance purchases

Theory suggests that firms move through distinct lifecycle stages that are determined by internal and external factors. Empirical evidence indicates that firm behavior differs across lifecycle stages. Using a sample of financial firms, specifically insurance companies, and a cashflow-based measure of lifecycle stages, we examine how demand for risk management varies across the corporate lifecycle. Employing reinsurance as our proxy for risk management, our results suggest that demand for risk management differs across lifecycle stages, with firms using more reinsurance in the introduction, growth, shake-out, and decline stages. We also find evidence that there are observable differences in the relation between reinsurance use and lifecycle stages when considering external and internal reinsurance separately. Finally, when we jointly consider the impact of lifecycles and factors capturing the main theoretical motives for reinsurance use, we continue to observe differences in the relation between lifecycle stages and the demand for internal and external reinsurance.