Hedging and Firm Value: Evidence from US Property-Liability Insurance Companies

This study examines the effect of derivatives hedging on firm value in US publicly traded property-liability insurance firms. We find that derivatives hedging is positively related to insurer’s firm value. For non-hedging activities, derivatives usage is not found to significantly affect firm value. We also provide evidence that the positive effect of derivatives hedging on firm value is more pronounced for firms with a higher level of leverage and utilizing more reinsurance, and firms that are larger; however, the positive impact is weakened for firms that have more geographic concentration and a larger portion of long-tail lines.