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Demutualisation, Control and Efficiency in the U.S. Life Insurance Industry

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  • Xiaoying Xie

    (Department of Finance, Mihaylo College of Business and Economics, California State University, Fullerton, CA 92834, U.S.A. E-mails: xxie@fullerton.edu; wlu@fullerton.edu; mstohs@fullerton.edu)

  • Weili Lu

    (Department of Finance, Mihaylo College of Business and Economics, California State University, Fullerton, CA 92834, U.S.A. E-mails: xxie@fullerton.edu; wlu@fullerton.edu; mstohs@fullerton.edu)

  • Joseph Reising

    () (Department of Finance, College of Business, Minnesota State University—Mankato, Mankato, MN 56001, U.S.A.)

  • Mark Hoven Stohs

    (Department of Finance, Mihaylo College of Business and Economics, California State University, Fullerton, CA 92834, U.S.A. E-mails: xxie@fullerton.edu; wlu@fullerton.edu; mstohs@fullerton.edu)

Abstract

This paper examines the role of corporate governance in the demutualisation wave in the U.S. life insurance industry during the 1990s and 2000s. The efficiency hypothesis suggests a firm should experience improved performance after demutualisation and managers should only gain from superior performance. Alternately, the managerial welfare hypothesis proposes that executives gain independence of company performance. This research suggests that demutualisation is value-enhancing for firms converting through initial public offerings (IPOs), but value-neutral for firms that convert but stay private. Firms converting into public companies experience increased CEO turnover that leads to efficiency improvement. CEOs of these firms receive higher compensation after demutualisation, but most of the gain is due to a jump in incentive compensation. Firms converting but staying private do not have a similar significant increase in CEO compensation. Overall, our results provide evidence that value-enhancement, not private managerial welfare, motivates demutualisation.

Suggested Citation

  • Xiaoying Xie & Weili Lu & Joseph Reising & Mark Hoven Stohs, 2011. "Demutualisation, Control and Efficiency in the U.S. Life Insurance Industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 36(2), pages 197-225, April.
  • Handle: RePEc:pal:gpprii:v:36:y:2011:i:2:p:197-225
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    Cited by:

    1. Wanke, Peter & Barros, Carlos Pestana, 2016. "Efficiency drivers in Brazilian insurance: A two-stage DEA meta frontier-data mining approach," Economic Modelling, Elsevier, vol. 53(C), pages 8-22.
    2. Biener, Christian & Eling, Martin, 2012. "Organization and efficiency in the international insurance industry: A cross-frontier analysis," European Journal of Operational Research, Elsevier, vol. 221(2), pages 454-468.

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