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Firm Value and Self-Insurance: Evidence from Manufacturers in California
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Author(s): Mu-Sheng Chang (California State University, Northridge, USA), Hsin-Hui Chiu (California State University, Northridge, USA)and Yanbo Jin (California State University, Northridge, USA)
Copyright: 2019
Volume: 8
Issue: 1
Pages: 15
Source title:
International Journal of Risk and Contingency Management (IJRCM)
Editor(s)-in-Chief: Narasimha Rao Vajjhala (University of New York Tirana, Albania)
DOI: 10.4018/IJRCM.2019010104
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Abstract
This article explores whether the alternative risk-transfer technique in the form of self-insurance can add value to the manufacturers that have self-insured for workers' compensation (WC) losses. The authors focus on publicly-owned manufacturers with at least 1,000 employees in California over the period 1970–2015 to examine the value implications of self-insurance adoption. This study employs a treatment-effects model to simultaneously estimate the determinants of self-insurance and the effect of self-insurance on firm value. The authors find that the relationship between firm value and self-insurance is time dependent. Risk preference for self-insurance reflects in higher market valuation among manufacturers over the periods of 1970–1983 and 1986–1999. These results suggest that self-insurance has a positive impact on firm value in the 1970s through the 1990s except for the liability crisis years 1984–1985. However, the benefits of self-insurance fail to materialize for self-insured manufacturers in the 2000s.
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