Why Firms Purchase Property Insurance?

46 Pages Posted: 23 Mar 2007

See all articles by Daniel Aunon-Nerin

Daniel Aunon-Nerin

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); FAME

Paul Ehling

BI - Norwegian Business School

Date Written: May 2007

Abstract

We investigate whether corporate finance incentives affect the extent of corporate hedging with property insurance. Using a database that contains detailed insurance information, we show that firms buy property insurance to reduce the expected costs of distress. Further, we document a scale effect: large firms purchase less insurance per unit of property. This is consistent with the notion that expected bankruptcy costs fall as firm size increases. We also show that the dividend payout ratio exerts a negative influence on property insurance coverage. This result is consistent with the view that firms with high payout ratio insure a smaller fraction of property because of cash flows in excess of investment needs, easy access to capital markets or both.

Keywords: Corporate Risk Management, Property Insurance

JEL Classification: G3, G22

Suggested Citation

Aunon-Nerin, Daniel and Ehling, Paul, Why Firms Purchase Property Insurance? (May 2007). Swiss Finance Institute Research Paper No. 07-16, Available at SSRN: https://ssrn.com/abstract=972120 or http://dx.doi.org/10.2139/ssrn.972120

Daniel Aunon-Nerin (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

FAME

40, Boulevard du Pont-d'Arve
40, Bd du Pont-d'Arve
1211 Geneva 4, CH-6900
Switzerland

Paul Ehling

BI - Norwegian Business School ( email )

N-0442 Oslo
Norway
+47 46410505 (Phone)

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