Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/251007 
Year of Publication: 
2021
Series/Report no.: 
Working Paper No. WP 2021-13
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
When firms approach distress, whether they engage in asset substitution (risk shifting) or rebuild equity (risk management) may depend on their access to capital markets. The property-casualty insurance industry has two features that make it ideal for testing this hypothesis: (1) the main losses for insurers are exogenous events like hurricanes that provide a strong instrument for financial distress; and (2) many insurers are organized as mutual companies, which cannot issue stock. Consistent with the importance of capital constraints, stock companies issue new equity following a negative shock, while mutual companies increase the riskiness of their investment portfolios.
Subjects: 
Risk shifting
insurance
reinsurance
capital structure
JEL: 
G22
G32
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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