Value from Hedging Risk with Reinsurance

Reinsurance is a transaction insurance firms use to hedge risk. Existing studies have only investigated the demand for reinsurance. Thus, we do not have direct evidence on whether the use of reinsurance creates value. Our study provides this evidence. We find a positive relation between the use of reinsurance and value. This relation is nuanced. Our results suggest that shareholders fully recognize the value of hedging only in the absence of noise in the firm's environment. Our results also suggest that the use of hedging creates value for shareholders because hedging may be a less expensive substitute to holding capital