We provide the first evidence on the effects of executive compensation on corporate risk management for insurers. Our unique data set allows the construction of a new, more complete measure of corporate risk management behavior. Specifically, we include hedging‐driven usage of not only derivatives but also insurance. To address potential endogeneity, we utilize a difference‐in‐differences approach, based on the implementation of FAS 123R that required firms to expense stock‐based compensation at fair value. We find that the decline in the convexity of executive compensation following FAS 123R led firms to significantly increase corporate risk management, primarily through increased demand for insurance.
The purpose of this study is to investigate the degree of adverse selection in the Korean individual annuity market using the money’s worth calculations. The insurers’ pricing of different annuity products reflects individual’s self-selection into products based on private information about their mortality prospects. Using payments offered for different products, money’s worth calculations were higher for younger and male annuitants, annuity with a bigger premium size and longer guarantee period, frontloaded (as opposed to level) annuity, joint (as opposed to single) annuity, tax-qualified (as opposed to non-tax-qualified) annuity, and deferred (as opposed to immediate) annuity. In a cross-country analysis, we observe that the cost of adverse selection is higher in countries with more generous social security income.
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