Market Value Relevance of Frontier Efficiency: Evidence from U.S. Property-Liability Insurance Acquisitions and Divestitures

35 Pages Posted: 17 Jan 2008

See all articles by J David Cummins

J David Cummins

Temple University - Risk Management & Insurance & Actuarial Science

Xiaoying Xie

California State University, Fullerton

Date Written: January 16, 2008

Abstract

This paper examines the relationship between firm efficiency and stock market reaction to acquisitions and divestitures in the US property-liability insurance industry during the period 1997-2003. We use data envelopment analysis (DEA) to estimate firm cost and revenue efficiency. Abnormal returns are measured using the standard market model event study methodology. We then conduct multiple regression analysis with cumulative abnormal returns as dependent variables and efficiency and control variables as regressors. The results show that efficient acquirers and targets have higher cumulative abnormal returns but inefficient divesting firms have higher cumulative abnormal returns. The findings are consistent with insurance acquisitions and divestitures being driven primarily by value-maximizing motivations and also show that frontier efficiency provides relevant information for value-maximizing managers.

Keywords: Insurance, data envelopment analysis, acquisitions, divestitures, event study

JEL Classification: G14, G14, G22, G24, G34

Suggested Citation

Cummins, J. David and Xie, Xiaoying, Market Value Relevance of Frontier Efficiency: Evidence from U.S. Property-Liability Insurance Acquisitions and Divestitures (January 16, 2008). Available at SSRN: https://ssrn.com/abstract=1084905 or http://dx.doi.org/10.2139/ssrn.1084905

J. David Cummins (Contact Author)

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1801 Liacouras Walk.
Philadelphia, PA 19122
United States
215-204-8468 (Phone)
215-204-4712 (Fax)

Xiaoying Xie

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States

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