The Effect of Diversification Relatedness on Firm Performance

This paper investigates the relationship between diversification relatedness and firm performance in the U.S. property-liability insurance industry. While prior research has evaluated the effect of diversification on insurer performance, little evidence exists regarding the relation between diversif...

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Veröffentlicht in:Journal of insurance issues 2017-10, Vol.40 (2), p.125-158
Hauptverfasser: Morris, Brandon C. L., Fier, Stephen G., Liebenberg, Andre P.
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Liebenberg, Andre P.
description This paper investigates the relationship between diversification relatedness and firm performance in the U.S. property-liability insurance industry. While prior research has evaluated the effect of diversification on insurer performance, little evidence exists regarding the relation between diversification strategy and performance for diversified firms. Theory suggests that potential costs and benefits are associated with related and unrelated forms of diversification and that these can vary along the relatedness continuum. We test for the net effect of diversification strategy and find that relatedness negatively impacts accounting performance. This relatedness penalty is robust to corrections for potential endogeneity bias, it exists for newly diversifying firms, and it has a differential effect on stock and mutual insurers. Finally, we find that related diversification is largely responsible for the diversification penalty found in prior research while unrelated diversification has no relation to accounting performance.
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source Business Source Complete; JSTOR Archive Collection A-Z Listing
subjects Accounting
Business cycles
Business insurance
Business structures
Data envelopment analysis
Diversification
Employee insurance
Homeowners insurance
Industrial sectors
Insurance industry
Insurance premiums
Insurance providers
Liability insurance
Mutual insurers
Product diversification
Writing
title The Effect of Diversification Relatedness on Firm Performance
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