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Market values and efficiency in US insurer acquisitions and divestitures


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  • J. David Cummins
  • Xiaoying Xie
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    Purpose - The purpose of this paper is to determine the market-value relevance of frontier efficiency scores and to test hypotheses from corporate control and production theory by analyzing the market response to US property–liability (P–L) insurer acquisitions and divestitures. Design/methodology/approach -Cost and revenue efficiencies are estimated based on accounting data for US P–L insurers using data envelopment analysis. The market-value response to acquisitions and divestitures is estimated using a standard market model event study. Regression analysis is used to measure the relationship between abnormal returns (dependent variable) and efficiency (independent variable), along with a set of control variables. Findings -The results show that acquirers, targets and divesting firms all have significant positive abnormal returns around announcement dates. We also find that efficient acquirers and targets have higher cumulative abnormal returns (CAR) but inefficient divesting firms have higher CARs. Research limitations/implications - The findings are consistent with insurance acquisitions and divestitures being driven primarily by value-maximizing motivations, consistent with corporate control and production theory. Practical implications -Frontier efficiency scores based on accounting data provide value-relevant information for insurance managers. Originality/value -This is one of only a few papers that relate frontier efficiency to market values and is the first paper to do this for the insurance industry. It is also one of only two existing papers that analyze the value relevance of efficiency scores in the context of mergers and acquisitions.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 35 (2009)
    Issue (Month): 2 ()
    Pages: 128-155

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    Handle: RePEc:eme:mfipps:v:35:y:2009:i:2:p:128-155

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK

    Related research

    Keywords: Acquisitions and mergers; Data analysis; Divestment; Insurance; United States of America;


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    Cited by:
    1. Cummins, J. David & Weiss, Mary A. & Xie, Xiaoying & Zi, Hongmin, 2010. "Economies of scope in financial services: A DEA efficiency analysis of the US insurance industry," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1525-1539, July.
    2. Gaganis , Chrysovalantis & Hasan, Iftekhar & Pasiouras , Fotios, 2013. "Efficiency and stock returns: Evidence from the insurance industry," Research Discussion Papers 14/2013, Bank of Finland.
    3. Xie, Xiaoying, 2010. "Are publicly held firms less efficient? Evidence from the US property-liability insurance industry," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1549-1563, July.


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