Indian Journal of Science and Technology

Abstract

Background/Objectives: This paper examines how hedging activities with property-liability insurance affect the likelihood of a firm’s financial distress. To this end, this study employs a pooled Ordinary Least Squares (OLS) regression with a dependent variable, “distance-to-default”. Methods/Statistical Analysis: This study proxies for a firm’s hedging activities using the extent of property-liability insurance use. As robustness checks, this study re-estimates a regression equation using a dependent variable, Z-scores. This study further performs an analysis using the fixed effects panel regressions. Findings: This study finds that the extent of property-liability insurance use is positively related to proxies for the likelihood of financial distress, proxied as “distant-to-default” and Z-scores. The findings indicate that firms with a higher extent of property-liability insurance use are less likely to be subject to financial difficulties. Improvements: Overall, this study suggests that firms can lower the likelihood of their financial distress using hedging with propertyliability insurance.

Keywords: Financial Distress, Hedging, Property-Liability Insurance