Market values and efficiency in US insurer acquisitions and divestitures

Purpose - The purpose of this paper is to determine the market-value relevance of frontier efficiency scores and to test hypotheses from corporate control and production theory by analyzing the market response to US property-liability (P-L) insurer acquisitions and divestitures. Design/methodology/approach - Cost and revenue efficiencies are estimated based on accounting data for US P-L insurers using data envelopment analysis. The market-value response to acquisitions and divestitures is estimated using a standard market model event study. Regression analysis is used to measure the relationship between abnormal returns (dependent variable) and efficiency (independent variable), along with a set of control variables. Findings - The results show that acquirers, targets and divesting firms all have significant positive abnormal returns around announcement dates. We also find that efficient acquirers and targets have higher cumulative abnormal returns (CAR) but inefficient divesting firms have higher CARs. Research limitations/implications - The findings are consistent with insurance acquisitions and divestitures being driven primarily by value-maximizing motivations, consistent with corporate control and production theory. Practical implications - Frontier efficiency scores based on accounting data provide valuerelevant information for insurance managers. Originality/value - This is one of only a few papers that relate frontier efficiency to market values and is the first paper to do this for the insurance industry. It is also one of only two existing papers that analyze the value relevance of efficiency scores in the context of mergers and acquisitions.