Effects of Business Diversification on Asset Risk-Taking: Evidence from the U.S. Property-Liability Insurance Industry

Posted: 14 Jul 2020

See all articles by Xin Che

Xin Che

California State University, Fullerton

Andre P. Liebenberg

University of Mississippi - School of Business Administration

Date Written: December 1, 2014

Abstract

We investigate the effect of line-of-business diversification on asset risk-taking in the U.S. property-liability industry. The coordinated risk management hypothesis (Schrand and Unal, 1998) implies a negative relation between underwriting risk and investment risk. Consistent with this hypothesis we find that diversified insurers take more asset risk than non-diversified insurers, and that the degree of asset risk-taking is positively related to diversification extent. Our results are robust to corrections for potential endogeneity bias, selectivity bias, and alternative diversification and asset risk measures. We also provide event study evidence that further supports the coordinated risk management hypothesis. Specifically, we find that when a focused firm diversifies, it increases its asset risk relative to firms that remain focused, and when a diversified firm refocuses, it reduces its asset risk relative to firms that remain diversified.

Keywords: Insurance, Diversification, Asset risk

JEL Classification: G22, G32, G39, M49

Suggested Citation

Che, Xin and Liebenberg, Andre P., Effects of Business Diversification on Asset Risk-Taking: Evidence from the U.S. Property-Liability Insurance Industry (December 1, 2014). Journal of Banking and Finance, Vol. 77, 2017, Available at SSRN: https://ssrn.com/abstract=3632161

Xin Che (Contact Author)

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States

Andre P. Liebenberg

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
127
PlumX Metrics