The Wealth Effect of Demutualization: Evidence From the U.S. Property-Liability and Life Insurance Industries |
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| Authors: | Gene C Lai ; Michael J McNamara† ; Tong Yu‡ |
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| Institution: | Gene C. Lai is Safeco distinguished professor of insurance at Washington State University;. Michael J. McNamara is Mutual of Enumclaw/Field professor of insurance at Washington State University;. Tong Yu is assistant professor at the University of Rhode Island |
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| Abstract: | This study examines the wealth effect of demutualization initial public offerings (IPOs) by investigating underpricing and postconversion long‐run stock performance. Our results suggest that there is more “money left on the table” for demutualized insurers than for non‐demutualized insurers. We show that higher underpricing for demutualized firms can be explained by greater market demand, market sentiment, and the size of the offering. Further, contrary to previous research reporting an average underperformance of industrial IPOs, we show that demutualization IPOs outperform non‐IPO firms with comparable size and book‐to‐market ratios and non‐demutualized insurers. We present evidence that the outperformance in stock returns is mainly attributable to improvement in post‐demutualization operating performance and demand at the time of the IPOs. The combined results of underpricing and long‐term performance suggest that the wealth of policyholders who choose stock rather than cash or policy credits is not harmed by demutualization. Stockholders who purchase demutualized company shares either during or after the IPO have earned superior returns. Our findings are consistent with the efficiency improvement hypothesis. |
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