Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1452: Financing Constraints and Risk Management: Evidence From Micro-Level Insurance Data

Emil Bustos (), Oliver Engist (), Gustav Martinsson () and Christian Thomann ()
Additional contact information
Emil Bustos: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Oliver Engist: Stockholm School of Economics
Gustav Martinsson: Royal Institute of Technology, Postal: Stockholm, Sweden
Christian Thomann: Royal Institute of Technology, Postal: Stockholm, Sweden

Abstract: We study the impact of financing constraints on corporate risk management. Using data on credit scores matched with unique information on firm level commercial insurance purchases, we find that financing constraints lead to higher insurance spending. We adopt a regression discontinuity design and show that financially constrained firms spend 5–14% more on insurance than otherwise similar unconstrained firms. Our findings add new insights to the longstanding empirical puzzle of whether financially constrained firms engage more in risk management. Furthermore, our results shed light on risk management in smaller, mostly private firms.

Keywords: Financing Constraints; Risk Management; Insurance Demand; Credit Scores

JEL-codes: D22; D25; G22; G32

Language: English

42 pages, December 20, 2022

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