Effects of Corporate Diversification: Evidence From the Property–Liability Insurance Industry |
| |
Authors: | Andre P Liebenberg David W Sommer |
| |
Institution: | 1. Andre P. Liebenberg is at the Department of Finance, School of Business Administration, University of Mississippi, Oxford, MS 38677;2. David W. Sommer is at the Bill Greehey School of Business, St. Mary's University, San Antonio, TX 78228. |
| |
Abstract: | Using a sample of property–liability insurers over the period 1995–2004, we develop and test a model that explains performance as a function of line‐of‐business diversification and other correlates. Our results indicate that undiversified insurers consistently outperform diversified insurers. In terms of accounting performance, we find a diversification penalty of at least 1 percent of return on assets or 2 percent of return on equity. These findings are robust to corrections for potential endogeneity bias, alternative risk measures, alternative diversification measures, and an alternative estimation technique. Using a market‐based performance measure (Tobin's Q) we find that the market applies a significant discount to diversified insurers. The existence of a diversification penalty (and diversification discount) provides strong support for the strategic focus hypothesis. We also find that insurance groups underperform unaffiliated insurers and that stock insurers outperform mutuals. |
| |
Keywords: | |
|
|