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Why Do Firms Use Insurance to Fund Worker Health Benefits? The Role of Corporate Finance

Dalton, Christina Marsh and Holland, Sara B. (2015): Why Do Firms Use Insurance to Fund Worker Health Benefits? The Role of Corporate Finance.

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Abstract

When a firm offers health benefits to workers, it exposes the firm to the risk of making payments when workers get sick. A firm can either pay health expenses out of its general assets, keeping the risk inside the firm, or it can purchase insurance, shifting the risk outside the firm. We analyze the firm’s decision to manage this risk. Using data on the insurance decisions of publicly-traded firms, we find that smaller firms, firms with more investment opportunities, and firms that face a convex tax schedule are more likely to hedge the risk of health benefit payments. Health risk is common to all firms, making this application an important contribution to understanding firms’ hedging decisions. Additionally, we reveal new and important determinants of the hedging decision relative to regulatory regimes. We also show that hedging health risk mitigates investment-cash flow sensitivities.

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