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The Wealth Effect of Demutualization: Evidence From the U.S. Property-Liability and Life Insurance Industries

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  • Gene C. Lai
  • Michael J. McNamara
  • Tong Yu

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. Copyright The Journal of Risk and Insurance, 2008.

Suggested Citation

  • Gene C. Lai & Michael J. McNamara & Tong Yu, 2008. "The Wealth Effect of Demutualization: Evidence From the U.S. Property-Liability and Life Insurance Industries," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(1), pages 125-144.
  • Handle: RePEc:bla:jrinsu:v:75:y:2008:i:1:p:125-144
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    Cited by:

    1. 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.
    2. Braun, Alexander & Schmeiser, Hato & Rymaszewski, Przemysław, 2015. "Stock vs. mutual insurers: Who should and who does charge more?," European Journal of Operational Research, Elsevier, vol. 242(3), pages 875-889.
    3. Otchere, Isaac & Owusu-Antwi, George & Mohsni, Sana, 2013. "Why are stock exchange IPOs so underpriced and yet outperform in the long run?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 76-98.

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