Hedging, Contract Enforceability, and Competition

Erasmo Giambona, Anil Kumar and Gordon M Phillips

The Review of Financial Studies, 2025, vol. 38, issue 7, 2034-2087

Abstract: We study how risk management through hedging affects firms and competition among firms in the life insurance industry, an industry with over 7 trillion in assets and over 1,000 private and public firms. We examine firms after a staggered state-level reform that reduces the costs of hedging by granting derivatives superpriority in case of insolvency. We show that firms that are likely to face costly external finance increase hedging and reduce risk and the probability of receivership. Firms that are likely to face costly external finance also lower prices, increase policy sales, and increase their market share post-reform.

Keywords: D02; D43; G22; G28; G32; G33 (search for similar items in EconPapers)
Date: 2025
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