Performance and Corporate Diversification: Evidence From the Insurance Industry

This article investigates whether corporate diversification may be driven by poor performance. We analyze Spanish non-life insurers’ diversification status and extent over a 13-year sample period. Performance is measured through cost/revenue inefficiency, adjusted for scale inefficiency. The results do not reject the hypothesis that poor cost and revenue performance motivates diversification (both status and total extent), suggesting that firms pursue it to better exploit diversification economies. However, inefficiency does not seem to explain the extent of unrelated diversification, indicating that such economies may arise under both related and unrelated strategies. In addition, our results appear to support the benefits of internal capital markets as a motive for diversification, since opaque insurers tend to exhibit higher levels of total diversification than transparent ones. Furthermore, non-life insurers seem to diversify into unrelated lines to circumvent barriers to growth in the product markets in which they operate. JEL CLASSIFICATION: G22; L25