Does Corporate Risk Management Affect Loan Contracting?

Both corporate risk management activities and corporate loan financing are widespread. Theory predicts that corporate risk management via insurance lowers a firm’s chance of financial distress and improves a firm’s transparency, thereby lowering the credit risk facing a corporate lender. In turn, lenders may be able to grant loans at more favourable terms than otherwise. There is, however, little empirical research on the empirical link between them. The project aims to investigate how an important type of corporate risk management activities – i.e., corporate purchase of general insurance (property and liability) - affects loan contracting. Insurance is an interesting setting as unlike derivatives trading, it is a pure hedge and cannot be used for speculation. Specifically, using a detailed contract-level database (Dealscan) and hand-collected unique insurance dataset, it examines whether the amount of corporate purchase of general insurance affects a) loan spreads and b) the setting of loan covenants.