How Does the Use of Credit Default Swaps Affect Firm Risk and Value? Evidence from US Life and Property/Casualty Insurance Companies

2012/09/13 by Hung‐Gay Fung, Min‐Ming Wen, Gaiyan Zhang
Economics, Econometrics and Finance · Social Sciences · #Banking stability, regulation, efficiency #Insurance and Financial Risk Management #Insurance, Mortality, Demography, Risk Management

paper · pdf · doi:10.1111/j.1755-053x.2012.01203.x

crossref issued 2012/09/13 · crossref published 2012/09/13 · crossref published-online 2012/09/13 · openalex publication_date 2012/09/13 · crossref created 2012/09/13 · crossref published-print 2012/12/01 · crossref deposited 2023/10/15 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/25 · crossref indexed 2026/07/25

Abstract

This study uses a unique credit default swap (CDS) transaction data set of insurers to examine the effects of CDS usage on the risk profile and firm value of US insurance companies for the period 2001‐2009. Applying a Heckman two‐stage model to adjust for the potential endogeneity of CDS usage with respect to firm risk and firm value, we find consistent evidence that the utilization of CDS for income generation purposes is associated with greater market risk, deterioration of financial performance, and lower firm value, for both Life and Property/Casualty insurers.

Citations

• Does Hedging Affect Firm Value? Evidence from the US Airline Industry
• The Determinants of Firms' Hedging Policies
• Does Greater Firm‐Specific Return Variation Mean More or Less Informed Stock Pricing?
• Derivatives Use and Risk Taking: Evidence from the Hedge Fund Industry
• Corporate financing and investment decisions when firms have information that investors do not have

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