The effect of CDS use on firm value of European Life and Property/Casualty Insurance Companies

  • Leah Njuguna

Abstract

Early in the 21st Century there was a rapid increase in the amount of credit default swaps (CDS). Even with this increase in CDS trading, there are mixed findings on the effect of CDS on financial stability. In this line, this study sought to examine the impacts of CDS utilization on the value of a firm. The study used a unique set of data from the Life and Property &Casualty insurance companies in Eurozone Economic Countries on their CDS transactions between the year 2001 and 2009. A two-stage Heckman model was used in adjusting any potential endogeneity of CDS utilisation in connection with firm value. The researcher examined how CDS usage has an impact on the market value of a firm and its performance. Logit regression model was employed in data analysis. The researcher found that there is consistent evidence that use of CDS for the purposes of income generation is related with a lower firm value, both the Life and Property & Casualty insurance companies

References

Acharya V. and Johnson T. (2007).Insider Trading in Credit Derivatives.Journal
ofFinancial Economics, 84, 110-141.
Amin M. (2006). The Tax Law on Foreign Exchange Net Investment Hedging.
Journal of Financial Economics, 71, 183-209.
Anupam C. and Randall C. (2010).Clearing Credit Default Swaps: A Case Study in
Global Legal Convergence, 10 CHI. J. INT’L L. 639, 639
Batten J. and Hogan W. (2002).A perspective on credit derivatives. International
Review of Financial Analysis, 11 (3), 251-278.
Blanco R., Brennan S. and Marsh W.I. (2005). “An Empirical Analysis of the
Dynamic Relation between Investment-grade Bonds and Credit Default Swaps.”Journal of Finance, 60 (5), 2255–81
Bushway S., Johnson B. and Slocum L. (2007).Is the magic still there? The use
of the Heckman two-step correction for selection bias in criminology. Journal ofQuantitative Criminology, 23 (2), 151-178.
Castillo J. (2009). Research population. Retrieved August 25, 2014, from World
Wide Web: http://www.experiment-resources.com/research-population.html
DaDalt P., Gay G.D. and Nam J. (2002). Asymmetric Information and Corporate
Derivatives Use. Journal of Futures Market, 22, 241-267.
Deutsche Bundesbank (2004). Credit Risk Transfer Instruments: Their Use by
German Banks and Aspects of Financial Stability.Monthly Report (April 2004), pp. 2744
Field A. (2000). Discovering Statistics using SPSS for Windows. London – Thousand
Oaks – New Delhi: Sage publications.
Finnerty J.D., Miller C.D. and Chen R. (2013). The impact of credit rating
announcements on credit default swap spreads. Journal of Banking and Finance, 37 (6), 2011-2030.
Foy A. (2004).Conducting Primary Research Online.Marketing Review, 4(3), 341-
360
Gold S. (2003). The design of a business simulation using a system-dynamics-
based approach. Developments in Business Simulation & Experiential Learning, 30, 243-243.
Goyal A. and Santa-Clara.P. (2001). Idiosyncratic Risk Matters Retrieved August 25,
2014 from the World Wide Web:http://www.econ.yale.edu/~shiller/behfin/2001-05-11/goyal-santa-clara.pdf
Guay W. and Kothari S. P. (2003). How much do firms hedge with derivatives?
Journal of Financial Economics, 70, 423–461.
Guido J. J., Winters P. C. and Rains A. (2006). Logistic Regression Basics.MSc
University of Rochester Medical Center, Rochester, NY. Retrieved August 25, 2014from the World Wide Web http://nesug.org/proceedings/nesug06/an/da26.pdf
Harrington S. E. (2009). The financial crisis, systemic risk, and the future
of insurance regulation. Journal of Risk and Insurance, 76(4), 785-819.
HentschelL., and Kothari S. P. (2001). Are corporations reducing or taking risks
with derivatives? Journal of Financial and Quantitative Analysis, 36, 93-118.
Hull J. (2012).Options, Futures and Other Derivatives, Pearson Education Limited;
Essex, England International Swaps and Derivatives Association (ISDA), Inc., 2010, ISDA Market Survey. Retrieved August 25, 2014 from the World Wide Web: http://www.isda.org/researchnotes/pdf/ConcentrationRN_4-10.pdf
Juurikkala O. (2011). Credit Default Swaps and Insurance. Journal of International
Banking Law and Regulation, 12, 128-135.
Kaplan Financial Education (2010).Property and Casualty Insurance
Licence Exam Manual. United States of America. Retrieved on 25 August 2014 fromthe World Wide Web:
http://www.kfeducation.com/downloads/NAT_P&C_LEM_FINALONLINE.pdf
Mackay and Moeller S. (2007).The Value of Corporate Risk Management.The
Journal of Finance, 52(3), 256-277.
Martin B. (1998). Hedging in Financial Markets.Statistical Laboratory,
Cambridge University, 28, 5-16
Marques J. (2007).Applied Statistics Using SPSS, STATISTICA, MATLAB and
R .Springer Berlin Heidelberg: New York.
Michael M. (2010). Credit Default Swaps and the Financial Crisis. The Financial
and Official Intervention, Columbia University, Academia Commons, 32.
Michael S. (2009). Secret Liens and the Financial Crisis of 2008.
Journal of Amsterdam Banking, 83, 253-298
Norden L. (2009).Credit Derivatives, Corporate News and Credit Ratings.Rotterdam
University Working Paper No. 26.
Orodho, A. (2010). Techniques of writing research proposals and reports
ineducation and social sciences. Nairobi: Kanezja HP Enterprises.
Precha T. (2004). Determining the Value of a Firm.Developments in
BusinessSimulation and Experiential Learning, 20, 187-201.
Ratner M. and Chih-Chieh C. (2013). Hedging stock sector risk with credit
default swaps. Journal of international Review of Financial Analysis, 11, 228-235
Wijn M. F. C. M. and Bijnen E. J. (2001).Firm size and bankruptcy elasticity.FEW
Research Memorandum, FEW797. Tilburg: Accounting. vfa
Published
2017-02-07