Coinsurance Effect Research Articles

경영권방어수단과 타인자본비용

[Purpose]This study examines the effect of Anti－Takeover Provisions(ATP, hereinafter referred to as ATP) on the cost of debt capital using credit ratings and borrowing interest rates. Through this, it is intended to clarify whether creditors interpret ATP, which means weakening shareholder rights, differently from shareholders.
 [Methodology]From 2011 to 2018, domestic companies listed on the KOSPI Market excluding the financial industry were selected as samples, and ATP were identified through the articles of incorporation. We conducted a regression analysis to verify the effect of Anti－Takeover Provision on the cost of debt.
 [Findings]As a result of the analysis, companies with ATP had relatively lower credit ratings and higher borrowing interest rates than those without ATP. And the more ATP they had, the lower their credit rating was. This is consistent with overseas empirical studies that the weakening of shareholder rights is also disadvantageous to creditors, supporting that mergers and acquisitions can benefit from coinsurance effect, which reduces the risk of default by improving the company’s debt capacity after the merger.
 [Implications]This study has contributions in that it analyzed the impact of strengthening (or weakening) shareholder rights on creditors using domestic data. Research and systems related to corporate governance have been dealt with a lot from the perspective of shareholders, but there is a lack of various studies on how they affect creditors. Creditors are major stakeholders of the company and play an important role in corporate governance. In this study, it is meaningful in that the impact of changes in corporate governance on them from the perspective of creditors was analyzed through ATP.

The value of Diversification—An empirical study based on 220 companies

In this study the value of diversification has been assessed by constructing the excess value of firms using the multiplier method. Through regression, it was found that there was 15.7% to 34.9% average loss from diversification during 2011-2015. The smaller the firm size, the more value would lose from diversification. It was found that cross-subsidization contributed to the firm’s value loss from diversification; meanwhile, coinsurance effect would not influence positively on firm value by removing the financial constraints as expected.

CEO overconfidence and bondholder wealth effects: Evidence from mergers and acquisitions

This study explores the influence of chief executive officer (CEO) overconfidence on acquirer bondholder wealth in mergers from 1994 to 2019. We find that CEO overconfidence benefits acquirer bondholders. Overconfident CEOs are likely to choose targets with lower return correlations rather than targets with lower risk than acquirers. We further show there is a positive wealth effect during announcement periods as well as firm risk reduction and a positive long-run bond market reaction subsequent to merger completion when overconfident acquirers merge with targets that are less correlated. Overall, the coinsurance effect dominates the liquidity effect on overconfident acquirer bondholder wealth during a merger.

The impact of CEO inside debt on the coinsurance effect and excess value of diversification

The tenets of agency theory suggest that CEO inside debt holdings induce risk-reducing corporate investments. Further, the coinsurance hypothesis implies that diversification strategies designed to decrease cross-segment correlations reduce firm risk. Motivated by these views, we hypothesize a positive relationship between CEO inside debt holdings and the risk-reducing (e.g., coinsurance) effect of diversification. Moreover, we examine the impact of coinsurance, induced by CEO inside debt holdings, on the excess value of diversification. Using a sample of 4053 firm-year observations for the period of 2006–2013, we document a positive relationship between CEO inside debt and the extent of the coinsurance effect of diversification. In addition, consistent with the implications of the managerial risk aversion hypothesis that risk-reducing corporate diversification strategies destroy shareholder value, our results show that the coinsurance effect of diversification, when induced by CEO inside debt, negatively affects the excess value of diversification.

Banking relationship, information reusability, and acquisition loans

We study whether and how banks reuse information across different but related borrowers in financing mergers and acquisitions. We find that stronger prior lending relationships between acquisition loan lenders and acquisition targets are associated with lower spreads and fewer covenant restrictions on acquisition loans. We show that the results are unlikely to be driven by unobservable acquirer, target, or lender characteristics. Consistent with the information asymmetry hypothesis, the effect is stronger when information asymmetry about the target firm is higher. We also find that the result is not driven by the coinsurance effect.

Acquisitions and the cost of debt: Evidence from China

A large body of literature has examined the effect of mergers and acquisitions (M&As) on firm valuation, and generally find that M&As reduce acquirers' shareholder value. However, relatively little is known about the effect of M&As on the pricing of corporate debt by debtholders, especially for firms in less developed countries. Using a sample of Chinese listed firms with outstanding bonds from 2007 to 2020, we find that the cost of debt is lower for acquirers than for non-acquirers, and that the effect of acquisitions in reducing cost of debt is more pronounced for firms from provinces with less developed markets, for private firms, and for firms undertaking cross-province acquisitions. Our results are robust to a series of robustness checks that address various endogeneity concerns, including the use of a matched-sample approach, the use of the Heckman two-stage model and a change analysis, the control for acquirers' pre-acquisition bond yield spread, and the exclusion of acquisitions of publicly listed targets. Our analyses of provincial institutional factors show that the relationship between M&As and cost of debt is moderated by government relations to market, private economy development, and the development of market intermediaries and legal environment. We further document that acquirers have lower default risk during the post-acquisition period because of a coinsurance effect, and that acquirers attract more analyst following and investors after acquisitions. Overall, our results indicate that acquisitions can reduce cost of debt through reducing firms' default risk and information risk, and that institutional factors matter for the effect of M&As on the cost of debt.

Asset Volatility and Capital Structure: Evidence from Corporate Mergers

We exploit cross-sectional variation in the predictable changes in asset volatility following corporate acquisitions to identify the effect of business risk on capital structure. We find that postmerger changes in leverage and cash holdings are strongly predicted by expected asset volatility changes estimated using premerger information. These capital structure adjustments are partly achieved through the choice of payment method. Our findings provide direct evidence for the coinsurance effect of mergers on debt capacity. More broadly, they suggest that firm risk is a first-order determinant of leverage, consistent with the tradeoff theory of capital structure. Our coefficient estimates imply that a one-standard deviation decline in a firm’s asset volatility corresponds to a 7.5-percentage point increase in leverage. This paper was accepted by Renee Adams, finance.

Does corporate groups accrue higher leverage: Emerging Market Evidence

This article explores the capital structure composition of group-affiliated firms. We find that group member firms choose to accrue higher debt ratios compared to non-group counterparts. Further disentangling the higher debt ratios of group-affiliates, we find risk-sharing or co-insurance effect whereby business groups enable member firms to share risks through income-smoothing and intra-group reallocation of resources. Our results suggest that business groups act as internal capital markets, assist affiliated firms overcome financial constraints, and ease access to external capital. Lastly, our study shows that group affiliations positively contribute to firms’ better financial performance relative to the non-group firms.

The Influence of Ownership Structure and Board Independence on the Cost of Debt in BRIC Countries

This paper presents an empirical analysis of the influence of ownership structure and board independence on bond yield spread in BRIC countries, 2007-2016. The main finding of the study is the presence of significant country-specific effects of ownership structure on the cost of debt, and the absence of effects of board independence. According to our results, in Brazil, insider ownership and concentrated ownership of corporations increase the cost of debt, while institutional investors help to mitigate the risks of debt holders. Only state and insider ownership matter in Russia: the larger the government stake, the higher the cost of debt, while insider ownership has a non-linear effect. In India insider ownership has an increasing effect, while state ownership has the inverse effect. Evidence from China reveals the decreasing influence of corporations’ ownership concentration, which can be a result of the co-insurance effect. We contribute to the literature by providing evidence from emerging markets, taking into account the specific features of each country and investigating the effect on market indicator of the cost of debt, the data on which is scarce. The results of this study can be used by rating agencies or investors for the evaluation of the risks related to bond issuers, as well as by debt issuers for attracting finance with lower costs.

The cost of capital effect of M&A transactions: Disentangling coinsurance from the diversification discount

AbstractThis study argues that in corporate diversification there is a bright side (coinsurance effect) and a dark side (diversification discount). While diversification might reduce systematic risk by its impact on the cost of financial distress, it might increase systematic risk because of inefficient cross‐subsidization at the same time. Building on an extension of the model of Hann, Ogneva, and Ozbas (), we analyze mergers and acquisitions in the US over the period 1985 to 2014. We find the coinsurance effect to decrease the cost of capital by 36 basis points for the average firm. However, at the same time, we observe a 7 basis points increase in the cost of capital related to the inefficiency of the firm's internal capital market. Both effects are statistically significant and robust to endogeneity concerns, different empirical specifications, and variable measurement.

The co-insurance effect hypothesis and the cost of bank loans: Evidence from Indonesian pyramidal business groups

This paper empirically tests the relationship between the position of a firm in a pyramidal business group and the firm's bank loan spread, in an Asian emerging market with a high incidence of pyramidal firms, a weak legal system, and high corporate dependency on bank loans. We use a data set of bank loan contracts for Indonesian pyramidal firms from 2006 to 2016. We find that banks charge lower loan prices to firms that are located in lower layers of a pyramidal chain, even after we control for many factors including expropriation risk. The finding suggests that banks consider that lower-layer firms receive a greater co-insurance effect than upper-layer firms because more internal resources are available down the ownership chain to lower credit risk.

Corporate Diversification and the Cost of Debt: The Role of Segment Disclosures

ABSTRACT Previous theoretical arguments suggest that industrial diversification provides a co-insurance effect that decreases the firm's default risk. In this paper, we endogenously estimate a firm's segment disclosure quality and investigate whether the quality of segment disclosures significantly affects bond investors' assessment of the co-insurance effect of diversification. We document that bonds issued by industrially diversified firms with high-quality segment disclosures have significantly lower yields than bonds issued by diversified firms with low-quality segment disclosures. We also find that the negative relation between industrial diversification and bond yields becomes stronger when firms improve segment disclosures as a result of FAS 131. Finally, we show that high-quality segment disclosures are associated with lower syndicated loan spreads for a subsample of loans issued by large bank syndicates, which are more likely to rely on publicly reported segment information. JEL Classifications: G31; G32; M10; O16.

Does Financial Synergy Provide a Rationale for Conglomerate Mergers?

AbstractWe examine two sources of financial synergies — coinsurance effects and asset liquidity — in mergers and test whether financial synergy is greater in conglomerate mergers than horizontal mergers. We find that a reduction in cash flow volatility for consolidated firms helps enhance shareholder value. Consistent with theoretical predictions of earlier studies, our results indicate that a merger can increase shareholder value when the cash flow volatility of the consolidated firm is less than the current cash flow volatility of the acquiring firm. We present new evidence that the source of financial synergies in conglomerate mergers comes mainly from higher asset liquidity. Our test results also suggest that liquidation values are higher in conglomerate mergers than horizontal mergers holding the coinsurance effect constant, particularly when the target is financially constrained.

Banking Relationship, Information Reusability, and Acquisition Loans

I study whether and how banks reuse information acquired from one borrower in loans made to different but related borrowers in financing mergers and acquisitions. Specifically, I find that stronger prior lending relationships between acquisition loan lenders and acquisition targets are associated with lower spreads and fewer covenant restrictions of acquisition loans. The results are unlikely to be driven by unobservable acquirer, target, or lender characteristics. Consistent with the information asymmetry hypothesis, the effect is stronger if the degree of information asymmetry of the target firm is higher. I also find that the result is not driven by the coinsurance effect.

Business group affiliation, ownership structure, and the cost of debt

This paper examines the relation between business group affiliation and the cost of debt capital. The co-insurance effect associated with business groups can reduce the cost of debt, while expropriation by controlling shareholders can raise the cost of debt. We find that firms affiliated with major Korean business groups (i.e., chaebols) enjoy a substantially lower cost of public debt than do independent firms, consistent with the co-insurance argument. We also examine several factors that influence the relation between group affiliation and the cost of debt, including a firm's uncertainty about the future payoffs of debtholders, pledgeable income, group-level resources, and position in the group structure. The results are all consistent with the co-insurance explanation. Our study highlights that the role of business groups in the debt market is distinct from the role of ownership structure.

Corporate Diversification and the Cost of Capital

ABSTRACTWe examine whether organizational form matters for a firm's cost of capital. Contrary to the conventional view, we argue that coinsurance among a firm's business units can reduce systematic risk through the avoidance of countercyclical deadweight costs. We find that diversified firms have, on average, a lower cost of capital than comparable portfolios of stand‐alone firms. In addition, diversified firms with less correlated segment cash flows have a lower cost of capital, consistent with a coinsurance effect. Holding cash flows constant, our estimates imply an average value gain of approximately 5% when moving from the highest to the lowest cash flow correlation quintile.

Coinsurance within Business Groups: Evidence from Related Party Transactions in an Emerging Market

Using novel transaction-level data on Chinese business groups, this study investigates the coinsurance effect of business groups. A business group member will receive support from its parent firm i...

Business Group Affiliation, Ownership Structure, and the Cost of Debt

This paper examines the relation between business group affiliation and the cost of debt capital. The co-insurance effect associated with business groups can reduce the cost of debt, while the expropriation by controlling shareholders can raise the cost of debt. We find that firms affiliated with major Korean business groups (i.e., chaebols) enjoy a substantially lower cost of public debt than do independent firms, consistent with the co-insurance argument. We also find that the effect of group affiliation on the cost of debt is stronger for firms with poor credit quality and with opaque financial statements, and when the economy is in downturns. These findings are consistent with the notion that the value of co-insurance increases with the uncertainty about the future payoffs of debtholders. Our study highlights that the role of business groups is distinct from and incremental to the role of ownership structure in the debt market.

Coinsurance effect and bank lines of credit

The coinsurance effect hypothesis predicts that firm diversification reduces financial constraints through imperfectly correlated cash flows among segments. We empirically test the hypothesis by studying the relation between coinsurance effect and bank lines of credit. We find that coinsurance effect is associated with a higher availability of bank lines of credit, and that diversified firms hold a higher level of bank lines of credit if they have higher investment opportunities and if they are bank-dependent. We find that diversified firms hold a higher fraction of corporate liquidity in the form of bank lines of credit due to the coinsurance effect. The findings are consistent with the coinsurance effect hypothesis and contribute to the debate on the value consequence of firm diversification by disclosing a specific channel through which firm diversification affects financial constraints.

Can the Coinsurance Effect Explain the Diversification Discount?

This paper examines whether the coinsurance effect can explain the diversification discount. Lower firm risk combined with higher leverage will cause a wealth transfer from shareholders to bondholders, thereby resulting in a lower excess value for diversified firms relative to that for focused firms. I find that firm risk is significantly lower and leverage is significantly higher for diversified firms even after controlling for other variables that may affect firm risk and leverage. However, the magnitude of the difference is not very large. For both the full sample and the sub-sample of pseudo conglomerates, the coinsurance effect is a significant determinant of the cross-sectional variation of excess value, but not the value loss from diversification. Specifically, the coefficient associated with the multi-segment dummy does not decrease and is still negative and significant even after firm leverage and firm risk are included in the regression specifications. I also find a significant and large diversification discount for all-equity firms. These results hold even after controlling for fixed firm and calendar year effects. These results stand in direct contrast to those reported in Mansi and Reeb (2002), and indicate that the coinsurance effect cannot explain away the diversification discount.