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

20 Pages Posted: 10 Mar 2008

See all articles by Gene C. Lai

Gene C. Lai

affiliation not provided to SSRN

Michael J. McNamara

affiliation not provided to SSRN

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

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.

Suggested Citation

Lai, Gene C. and McNamara, Michael J. and Yu, Tong, The Wealth Effect of Demutualization: Evidence from the U.S. Property-Liability and Life Insurance Industries. Journal of Risk & Insurance, Vol. 75, Issue 1, pp. 125-144, March 2008, Available at SSRN: https://ssrn.com/abstract=1103702 or http://dx.doi.org/10.1111/j.1539-6975.2007.00251.x

Gene C. Lai (Contact Author)

affiliation not provided to SSRN

Michael J. McNamara

affiliation not provided to SSRN

Tong Yu

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
4019548606 (Phone)
4019548606 (Fax)

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