Determinants of Corporate Hedging Behavior : Evidence from the Life Insurance Industry

Using data collected from the annual statements of 571 life insurers, separate models are estimated for the probability and degree of use of futures and options by life insurers for the purpose of hedging economic risk. The results support the informational economies hypothesis, the bankruptcy costs and underinvestment hypotheses, and the managerial discretion hypothesis. The results also suggest that an insurer's matching of asset and liability durations (on-balance-sheet hedging) serves as a substitute for hedging with futures and options (off-balance-sheet hedging) and that the use of reinsurance serves as a signal for those firms that are predisposed to hedging firm risk