Some Like It Safe: Agency and Corporate Purchase of Insurance

This paper documents that managers having large private benefits of control tend to purchase more insurance to reduce their exposure to the firm's unsystematic risk. Private benefits of control are estimated as the difference between the price of the stock and an equivalent synthetic stock (constructed with options). Our empirical analysis controls for the simultaneity between the choice of the limit of coverage of property insurance and capital structure. We find that our measure of private benefits of control is a significant predictor of the coverage limit of corporate insurance contracts. We also corroborate previous findings that firms with higher long term debt ratio and smaller market value tend to buy more property insurance.