 The impact of CEO inside debt on the coinsurance effect and excess value of diversificationFeras M. Salama and Anis Samet International Review of Economics & Finance, 2022, vol. 81, issue C, 58-74 Abstract: 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. Keywords: Corporate diversification; Compensation; Agency theory; Firm value (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:81:y:2022:i:c:p:58-74 DOI: 10.1016/j.iref.2022.04.004 Access Statistics for this article International Review of Economics & Finance is currently edited by H. Beladi and C. Chen More articles in International Review of Economics & Finance from Elsevier |
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