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On the Demand for Corporate Insurance: Creating Value

  • Richard MacMinn
  • James Garven
Chapter

Abstract

Ever since Mayers and Smith first claimed, 30 years ago, that the corporate form provides an effective hedge that allows stockholders to eliminate insurable risk through diversification, the quest to explain the corporate demand for insurance has continued. Their claim is demonstrated here so that the corporate demand for insurance may be distinguished from the individual’s demand for insurance. Then some of the determinants of the demand for corporate insurance that exist in the literature are reviewed and generalized. The generalizations show how the corporation may use insurance to solve underinvestment and risk-shifting problems; the analysis includes a new simpler proof of how the risk-shifting problem may be solved with corporate insurance. Management compensation is also introduced here and the analysis shows the conditions which motivate the corporate insurance decision. Finally, some discussion is provided concerning the empirical implications of the extant theory, the tests that have been made, and the tests that should be made going forward.

Keywords

Agency Cost Stock Option Insurance Contract Corporate Insurance Convertible Bond 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer Science + Business media, New York 2013

Authors and Affiliations

  1. 1.Illinois State UniversityNormalUSA
  2. 2.Baylor UniversityWacoUSA

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