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Coinsurance effect and bank lines of credit

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  • Tong, Zhenxu

Abstract

The coinsurance effect hypothesis predicts that firm diversification reduces financial constraints through imperfectly correlated cash flows among segments. We empirically test the hypothesis by studying the relation between coinsurance effect and bank lines of credit. We find that coinsurance effect is associated with a higher availability of bank lines of credit, and that diversified firms hold a higher level of bank lines of credit if they have higher investment opportunities and if they are bank-dependent. We find that diversified firms hold a higher fraction of corporate liquidity in the form of bank lines of credit due to the coinsurance effect. The findings are consistent with the coinsurance effect hypothesis and contribute to the debate on the value consequence of firm diversification by disclosing a specific channel through which firm diversification affects financial constraints.

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  • Tong, Zhenxu, 2012. "Coinsurance effect and bank lines of credit," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1592-1603.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:6:p:1592-1603
    DOI: 10.1016/j.jbankfin.2012.01.006
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    Cited by:

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    3. Viswanathan Nagarajan & Pitabas Mohanty & Apalak Khatua, 2023. "Financing effects of corporate diversification: A review," Review of Managerial Science, Springer, vol. 17(7), pages 2555-2585, October.
    4. Patrick Bielstein & Mario Fischer & Christoph Kaserer, 2018. "The cost of capital effect of M&A transactions: Disentangling coinsurance from the diversification discount," European Financial Management, European Financial Management Association, vol. 24(4), pages 650-679, September.
    5. Zhenxu Tong, 2015. "Labor Unions and Forms of Corporate Liquidity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(7-8), pages 1007-1039, September.
    6. Aivazian, Varouj A. & Qiu, Jiaping & Rahaman, Mohammad M., 2015. "Bank loan contracting and corporate diversification: Does organizational structure matter to lenders?," Journal of Financial Intermediation, Elsevier, vol. 24(2), pages 252-282.
    7. Haykel Zouaoui & Faten Zoghlami, 2023. "What do we know about the impact of income diversification on bank performance? A systematic literature review," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(3), pages 286-309, September.

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    More about this item

    Keywords

    Coinsurance effect; Bank lines of credit; Firm diversification;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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