Three Essays On Diversification Strategy, Diversification Performance, And Corporate Misconduct
The first essay investigates the relationship between diversification strategy and firm performance in the U.S. property-liability insurance industry. Prior literature has evaluated the effect of total diversification on insurer performance; however, there is an absence of evidence on the effect of diversification strategy for multi-line insurers. Theory suggests that related diversifiers should benefit from economies of scope while unrelated diversifiers should benefit from uncorrelated earnings streams. We test for the net effect of diversification strategy and find that relatedness negatively impacts accounting performance. However, we find that the relatedness penalty is confined to stock insurers while mutual insurers' profitability appears to be unaffected by diversification strategy. Our article is the first to document the strategy-performance effect within U.S. property liability insurers. The second essay measures the impact government enforcement actions have on investor confidence by examining changes in market quality in the firms investigated by the Securities and Exchange Commission for fraud. The market quality measures we test include returns, price volatility, spreads, and Amihud's (2002) illiquidity measure. We find that returns improve and price volatility reduces during an SEC investigation. However, spreads widen and illiquidity significantly increases after controlling for the known determinants of liquidity. Our work highlights some of the benefits and costs of having an active regulator of the US securities market. This article investigates the source of the diversification discount commonly found in the literature pertaining to corporate diversification (Berger and Ofek, 1995). Prior studies have had difficulty identifying the source of the discount due to data limitations from traditional sources. We use a sample of U.S. property casualty insurers with performance data (loss ratio) available at the segment-level, we are able to track the performance of existing segments before and after the firm acquires a new business line. This allows us to determine whether the discount is due to the underperformance of the newly acquired segments and/or if the addition of a new line actually affects the performance of the existing lines. We find evidence that diversifying firms underperform in the three years before the diversification event, and that the performance disparity between diversifying and non-diversifying firms dramatically widens in the post-diversification period. We document that the existing business segment's loss ratios increase by 5.4% (worsens) in the year the firm diversifies, and remains consistently higher for the next 3 years. We also find that the new lines significantly outperform the existing business lines by an average margin of 6% in the post-diversification period. Our multivariate tests confirm these results. Therefore, we trace the source of the diversification discount to the declining performance in the existing business segments following the addition of a new line, supporting the notion that corporate diversification destroys value.
Corporate Misconduct, Diversification, Sec, Strategy, Finance
Networked Digital Library of Theses and Dissertations