Hedging Affecting Firm Value via Financing and Investment: Evidence from Property Insurance Use


  • Hong Zou

    1. Hong Zou is an Associate Professor in the Department of Economics and Finance at City University of Hong Kong, Kowloon Tong, Kowloon, Hong Kong, China.
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  • I wish to thank two anonymous reviewers, William Christie (the editor), Mike Adams, Steve Diacon, Mike Firth, Chen Lin, Jim Wei, Jason Xiao, and Rongli Yuan for their helpful suggestions on the paper. I am also grateful to seminar participants at the Department of Economics and Finance of City University of Hong Kong and the Department of Economics of Lingnan University. I owe my indebtedness to my supervisor, Professor Mike Adams. I acknowledge the financial support of the Association of British Insurers and the Research and Postgraduate Studies Panel of Lingnan University (Grant No. DB06A2). The research assistance of Wei Cui, Yong Tang, and Wanbin Pan is appreciated. Any errors or omissions remain my own.


I provide evidence about the value effects of alternative risk management by examining corporate purchase of property insurance, a commonly used pure hedge of asset-loss risks. Using an insurance data set from China, I find that there is an inverted U-shape effect of the extent of property insurance use on firm value measured by several versions of Tobin's Q. Therefore, the use of property insurance, to a certain degree, has a positive effect on firm value; however, over insurance appears detrimental to firm value. Given that the inflection points occur at relatively high levels of the observed insurance spending, insurance use appears beneficial to the majority of my sample firms. The estimated average hedging premium is about 1.5%. I demonstrate that an avenue for insurance to create value in China is that it helps firms secure valuable new debt financing and enhance investment.