Get the Balance Right: A Simultaneous Equation Model to Analyze Growth, Profitability, and Safety

52 Pages Posted: 29 Nov 2017 Last revised: 13 Apr 2018

See all articles by Martin Eling

Martin Eling

University of St. Gallen - Institute of Insurance Economics; University of Saint Gallen - School of Finance (SoF)

Ruo Jia

University of St. Gallen - Institute of Insurance Economics; University of St. Gallen - School of Finance

Philipp Schaper

University of St. Gallen - School of Finance

Date Written: October 28, 2017

Abstract

Extant literature suggests that the relationships among growth, profitability, and safety are reciprocal. Consequently, we develop a simultaneous equation model to test the three relationship pairs. Analyzing eleven years of data for 1,988 European insurance companies, we find that moderate firm growth has a positive impact on profitability; however, extremely high growth reduces profitability. Moderate firm growth also reduces firm risk. In addition, we document that less profitable companies are risk-seeking, a result in line with prospect theory. The longitudinal analysis illustrates that firms initially prioritizing profitability over growth are more likely to reach the ideal state of “profitable growth”.

Keywords: firm performance, simultaneous equation model, goal conflicts, financial services, insurance

Suggested Citation

Eling, Martin and Jia, Ruo and Schaper, Philipp, Get the Balance Right: A Simultaneous Equation Model to Analyze Growth, Profitability, and Safety (October 28, 2017). University of St.Gallen, School of Finance Research Paper No. 2017/16. Available at SSRN: https://ssrn.com/abstract=3078470 or http://dx.doi.org/10.2139/ssrn.3078470

Martin Eling (Contact Author)

University of St. Gallen - Institute of Insurance Economics ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

University of Saint Gallen - School of Finance (SoF) ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Ruo Jia

University of St. Gallen - Institute of Insurance Economics ( email )

Kirchlistrasse 2
St. Gallen, St. Gallen 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Kirchlistrasse 2
St.Gallen, CH-9010
Switzerland
+41 71 224 79 74 (Phone)
+41 71 224 79 90 (Fax)

HOME PAGE: http://www.ivw.unisg.ch/de/Lehrstuhl%20Eling/Team%20VM?person=b8b3d7ef-04dd-4693-8b9f-946e91a6bcf4&n

Philipp Schaper

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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