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The Effect of Diversification under Different Ownership Structures and Economic Conditions: Evidence from the Great Recession

1
Department of Finance, School of Business Administration, University of Mississippi, Oxford, MS 38677, USA
2
The David D. Reh School of Business, Clarkson University, Potsdam, NY 13699, USA
*
Author to whom correspondence should be addressed.
J. Risk Financial Manag. 2019, 12(2), 82; https://doi.org/10.3390/jrfm12020082
Received: 3 April 2019 / Revised: 1 May 2019 / Accepted: 1 May 2019 / Published: 10 May 2019
(This article belongs to the Special Issue Financial Crises, Macroeconomic Management, and Financial Regulation)
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Abstract

The effect of corporate diversification on firm performance has been extensively documented in the literature. In the general finance literature, Kuppuswamy and Villalonga (2015) studied the diversification effect during the 2007–2009 financial crisis and found that diversification adds value in the presence of external financing constraints. Motivated by this finding, we investigate whether a similar effect applies to insurance firms and we develop hypotheses for their different ownership structures (stock vs. mutual insurers; and group vs. non-group affiliated insurers). Using a sample of property-liability insurers over a period of 2004 to 2013, we find that the effect of diversification on performance is contingent on ownership structures and economic conditions. The diversification effect for stock insurers and insurers affiliated with a group is not significantly affected by economic conditions. However, the diversification effect for mutual insurers and non-affiliated insurers is reversed during the financial crisis. More specifically, diversified firms with these kinds of ownership structures perform better than focused firms during normal economic conditions, but their performance was significantly worse during the financial crisis. Our results are robust to alternative measures of performance and diversification, and to corrections for endogeneity. Our study contributes to the diversification literature by showing how the effect of diversification varies with ownership structure under different economic conditions and the results shed light on the specific circumstances in which diversification can improve or reduce performance. View Full-Text
Keywords: corporate diversification; financial crisis; Great Recession; property-liability insurance corporate diversification; financial crisis; Great Recession; property-liability insurance
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Liebenberg, I.A.; Lin, Z. The Effect of Diversification under Different Ownership Structures and Economic Conditions: Evidence from the Great Recession. J. Risk Financial Manag. 2019, 12, 82.

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