Market values and efficiency in US insurer acquisitions and divestitures

Abstract

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.Rese...