Coinsurance Effect and Bank Lines of Credit

摘要

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 the coinsurance effect and bank lines of credit. We find that the coinsurance effect is associated with a higher availability of bank lines of credit and a higher debt capacity. We find that diversified firms hold a larger fraction of corporate liquidity in the form of bank lines of credit than single-segment firms due to the coinsurance effect. We also find that the coinsurance effect reduces the likelihoods of covenant violations. The findings are consistent with the coinsurance effect hypothesis and disclose a specific channel through which firm diversification affects financial constraints.