This study develops a theoretical model to analyze the asset substitution problem over insurance decisions. We find that agency conflict is related to a firm’s risk level and capital structure. In particular, at the optimal leverage, agency conflict occurs only when the risk level is relatively high, which explains why insurance covenants are typically for significant pure risks. Moreover, when the risk level is specified, agency conflict over insurance decisions occurs within a specific leverage range. This is consistent with the findings of some research on the asset substitution problem over speculative risk choices. In addition, we consider premium loadings and conclude that full hedging is not a firm’s optimal risk management strategy, contributing to the literature on optimal hedging decisions with transaction frictions. Our framework with premium loadings can also explain many insurance phenomena, such as risk retention for small losses and subsidies for catastrophe insurance.

We conduct a comprehensive study on momentum spillovers in the Chinese stock market using various types of economic linkages, with particular attention to momentum spillover via news co-mention linkages. We utilize millions of Chinese business news articles and develop a flexible and innovative algorithm to identify linkages among listed firms. We find that news co-mention momentum spillover is stronger than others, unifying various forms of momentum spillover effects in the Chinese market and replacing the role of analyst co-coverage in the U.S. News co-mention identifies a wide range of economically important linkages, particularly recovering more cross-industry linkages than other link identification methods, which contributes to its strong performance.