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

Department of Risk Management and Insurance, School of Economics, Peking University

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

Department of Risk Management and Insurance, School of Economics, Peking University ( email )

Yiheyuan Rd. 5
Haidian
Beijing, 100871
China

Philipp Schaper

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

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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