Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter June 29, 2017

Does Diversification Drive Down Risk-adjusted Returns? A Quantile Regression Approach

  • Jeungbo Shim EMAIL logo


This study examines diversification-performance relationship in the U.S. property-liability insurance industry over the period of 1996–2010. Unlike prior studies that rely on the conditional mean estimation method, we employ quantile regression, which captures the heterogeneous effects of diversification on conditional return distribution. The results show that diversification does not necessarily drive down risk-adjusted returns and its effects vary along return distribution. We find that there is a diversification discount for firms in the lower levels of return distribution, whereas a diversification premium exists for firms in the upper levels of return distribution. We provide evidence that the relations between risk-adjusted returns and other explanatory variables are not constant, but vary over the quantiles of return distribution. Our results are robust to alternative measures of an insurer’s performance and product diversification.

JEL Classification: G22; L25; C21


Berger, A. N., J. D. Cummins, and M. A. Weiss. 1997. “The Co-Existence of Multiple Distribution Systems for Financial Services: The Case of Property-Liability Insurance.” The Journal of Business 70 (4):515–546.10.1086/209730Search in Google Scholar

Berger, A. N., J. D. Cummins, M. A. Weiss, and H. Zi. 2000. “Conglomeration versus Strategic Focus: Evidence from the Insurance Industry.” Journal of Financial Intermediation 9:323–362.10.1006/jfin.2000.0295Search in Google Scholar

Berger, P. G., and E. Ofek. 1995. “Diversification’s Effect on Firm Value.” Journal of Financial Economics 37:39–65.10.1016/0304-405X(94)00798-6Search in Google Scholar

Berry-Stolzle, T. R., A. P. Liebenberg, J. S. Ruhland, and D. W. Sommer. 2012. “Determinants of Corporate Diversification: Evidence from the Property-Liability Insurance Industry.” Journal of Risk and Insurance 79:381–413.10.1111/j.1539-6975.2011.01423.xSearch in Google Scholar

Binder, M., and A. Coad. 2011. “From Average Joe’s Happiness to Miserable Jane and Cheerful John: Using Quantile Regressions to Analyze the Full Subjective Well-being Distribution.” Journal of Economic Behavior & Organization 79:275–290.10.1016/j.jebo.2011.02.005Search in Google Scholar

Borghesi, R., J. Houston, and A. Naranjo. 2007. “Value, Survival, and the Evolution of Firm Organizational Structure.” Financial Management 36:5–31.10.1111/j.1755-053X.2007.tb00078.xSearch in Google Scholar

Cade, B. S., and B. R. Noon. 2003. “A Gentle Introduction to Quantile Regression for Ecologists.” Frontiers in Ecology and the Environment 1:412–420.10.1890/1540-9295(2003)001[0412:AGITQR]2.0.CO;2Search in Google Scholar

Campa, J. M., and S. Kedia. 2002. “Explaining the Diversification Discount.” Journal of Finance 57:1731–1762.10.1111/1540-6261.00476Search in Google Scholar

Cebenoyan, A. S., and P. E. Strahan. 2004. “Risk Management, Capital Structure and Lending at Banks.” Journal of Banking and Finance 28:19–43.10.1016/S0378-4266(02)00391-6Search in Google Scholar

Chen, R., and K. A. Wong. 2004. “The Determinants of Financial Health Of Asian Insurance Companies.” Journal of Risk and Insurance 71:469–499.10.1111/j.0022-4367.2004.00099.xSearch in Google Scholar

Chen, S.-T., H.-I. Kuo, and C. C. Chen. 2012. “Estimating the Extreme Behaviors of Students Performance Using Quantile Regression – Evidences from Taiwan.” Education Economics 20 (1):93–113.10.1080/09645292.2010.545517Search in Google Scholar

Chung, K. H., and S. W. Pruitt. 1994. “A Simple Approximation of Tobin’s Q.” Financial Management 23:70–74.10.2307/3665623Search in Google Scholar

Cloquitt, L. L., and R. E. Hoyt. 1997. “Determinants of Corporate Hedging Behavior: Evidence from the Life Insurance Industry.” Journal of Risk and Insurance 64:649–671.10.2307/253890Search in Google Scholar

Colquitt, L. L., D. W. Sommer, and N. H. Godwin. 1999. “Determinants of Cash Holding by Property-Liability Insurers.” Journal of Risk and Insurance 66:401–415.10.2307/253554Search in Google Scholar

Core, J., W. Guay, and T. Rusticus. 2006. “Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors’ Expectations.” Journal of Finance 61:655–687.10.1111/j.1540-6261.2006.00851.xSearch in Google Scholar

Cummins, J. D., and G. Nini. 2002. “Optimal Capital Utilization by Financial Firms: Evidence from the Property-Liability Insurance Industry.” Journal of Financial Services Research 21:15–53.10.1023/A:1014369617192Search in Google Scholar

Cummins, J. D., M. A. Weiss, X. Xie, and H. Zi. 2010. “Economies of Scope in Financial Services: A DEA Efficiency Analysis of the US Insurance Industry.” Journal of Banking and Finance 34:1525–1539.10.1016/j.jbankfin.2010.02.025Search in Google Scholar

Cummins, J. D., and X. Xie. 2008. “Mergers & Acquisitions in the U.S. Property-Liability Insurance Industry: Productivity and Efficiency Effects.” Journal of Banking and Finance 32:30–55.10.2139/ssrn.997939Search in Google Scholar

Denis, D. J., D. K. Denis, and A. Sarin. 1997. “Agency Problems, Equity Ownership, and Corporate Diversification.” Journal of Finance 52:135–160.10.1111/j.1540-6261.1997.tb03811.xSearch in Google Scholar

DeYoung, R., and K. P. Roland. 2001. “Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model.” Journal of Financial Intermediation 10:54–84.10.1006/jfin.2000.0305Search in Google Scholar

Elango, B., Y. Ma, and N. Pope. 2008. “An Investigation into the Diversification-Performance Relationship in the U.S. Property-Liability Insurance Industry.” Journal of Risk and Insurance 75:567–591.10.1111/j.1539-6975.2008.00275.xSearch in Google Scholar

Fama, E. F., and K. R. French. 1992. “The Cross-section of Expected Stock Returns.” Journal of Finance 47:427–466.10.1111/j.1540-6261.1992.tb04398.xSearch in Google Scholar

Filson, D., and S. Olfati. 2014. “The Impacts of Gramm–Leach–Bliley Bank Diversification on Value and Risk.” Journal of Banking & Finance 41:209–221.10.1016/j.jbankfin.2014.01.019Search in Google Scholar

Fok, R. C. W., Y.-C. Chang, and W.-T. Lee. 2004. “Bank Relationships and Their Effects on Firm Performance around the Asian Financial Crisis: Evidence from Taiwan.” Financial Management 33 (2):89–112.Search in Google Scholar

García-Herrero, A., and F. Vázquez. 2013. “International Diversification Gains and Home Bias in Banking.” Journal of Banking & Finance 37:2560–2571.10.1016/j.jbankfin.2013.02.024Search in Google Scholar

Gompers, P., J. Ishii, and A. Metrick. 2003. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics 118:107–155.10.3386/w8449Search in Google Scholar

Hao, L., and D. Q. Naiman. 2007. Quantile Regression. Thousand Oaks, CA: SAGE Publications.10.4135/9781412985550Search in Google Scholar

Heckman, J. 1979. “Sample Selection Bias as a Specification Error.” Econometrica 47:153–161.10.2307/1912352Search in Google Scholar

Hoechle, D., M. Schmid, I. Walter, and D. Yermack. 2012. “How Much of the Diversification Discount Can Be Explained by Poor Corporate Governance?.” Journal of Financial Economics 103:41–60.10.1016/j.jfineco.2011.03.025Search in Google Scholar

Hoyt, R. E., and J. S. Trieschmann. 1991. “Risk/Return Relationships for Life-Health, Property- Liability, and Diversified Insurers.” Journal of Risk and Insurance 58:322–330.10.2307/253240Search in Google Scholar

Jensen, M. 1986. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” The American Economic Review 76:323–329.10.1017/CBO9780511609435.005Search in Google Scholar

Koenker, R., and G. Bassett. 1978. “Regression Quantiles.” Econometrica 46:33–50.10.2307/1913643Search in Google Scholar

Koenker, R., and K. Hallock. 2001. “Quantile Regression: An Introduction.” Journal of Economic Perspectives 15:143–156.10.1257/jep.15.4.143Search in Google Scholar

Laeven, L., and R. Levine. 2007. “Is There a Diversification Discount in Financial Conglomerates?.” Journal of Financial Economics 85:331–367.10.3386/w11499Search in Google Scholar

Lang, L. H. P., and R. M. Stulz. 1994. “Tobin’s q, Corporate Diversification, and Firm Performance.” Journal of Political Economy 102:1248–1280.10.3386/w4376Search in Google Scholar

Lee, B. S., and M. L. Li. 2012. “Diversification and Risk-adjusted Performance: A Quantile Regression Approach.” Journal of Banking and Finance 36:2157–2173.10.1016/j.jbankfin.2012.03.020Search in Google Scholar

Liebenberg, A. P., and D. W. Sommer. 2008. “Effect of Corporate Diversification: Evidence From Property-Liability Insurance Industry.” Journal of Risk and Insurance 75:893–919.10.1111/j.1539-6975.2008.00290.xSearch in Google Scholar

Ma, L., and L. Pohlman. 2008. “Return Forecasts and Optimal Portfolio Construction: A Quantile Regression Approach.” The European Journal of Finance 14:409–425.10.1080/13518470802042369Search in Google Scholar

Meador, J. W., H. E. Ryan, and C. D. Schellhorn. 2000. “Product Focus versus Diversification: Estimates of X-Efficiency for the US Life Insurance Industry.” In Performance of Financial Institution: Efficiency, Innovation, Regulation, eds T. H. Patrck and A. Z. Savros. New York: Cambridge University Press.Search in Google Scholar

Montgomery, C. A. 1985. “Product-Market Diversification and Market Power.” Academy of Management Journal 28:789–798.10.2307/256237Search in Google Scholar

Myers, S. C., and J. A. Read. 2001. “Capital Allocation for Insurance Companies.” Journal of Risk and Insurance 68:545–580.10.2307/2691539Search in Google Scholar

Phillips, R. D., J. D. Cummins, and F. Allen. 1998. “Financial Pricing of Insurance in the Multiple- Line Insurance Company.” Journal of Risk and Insurance 65:597–636.10.2307/253804Search in Google Scholar

Rivard, R. J., and C. R. Thomas. 1997. “The Effect of Interstate Banking on Large Bank Holding Company Profitability and Risk.” Journal of Economics and Business 49 (1):61–76.10.1016/S0148-6195(96)00041-0Search in Google Scholar

Santalo, J., and M. Becerra. 2008. “Competition from Specialized Firms and the Diversification- Performance Linkage.” Journal of Finance 63 (2):851–883.10.1111/j.1540-6261.2008.01333.xSearch in Google Scholar

Schaeck, K. 2008. “Bank Liability Structure, FDIC Loss, and Time to Failure: A quantile Regression Approach.” Journal of Financial Services Research 33:163–179.10.1007/s10693-008-0028-5Search in Google Scholar

Scharfstein, D. S. 1998. The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates. NBER Working Paper No. 6352.10.3386/w6352Search in Google Scholar

Servaes, H. 1996. “The Value of Diversification During the Conglomerate Merger Wave.” Journal of Finance 51:1201–1225.10.1111/j.1540-6261.1996.tb04067.xSearch in Google Scholar

Shim, J. 2010. “Capital-based Regulation, Portfolio Risk and Capital Determination: Empirical Evidence from the U.S. Property-Liability Insurers.” Journal of Banking and Finance 34:2450–2461.10.1016/j.jbankfin.2010.04.003Search in Google Scholar

Shim, J. 2011. “Mergers & Acquisitions, Diversification and Performance in the U.S. Property- Liability Insurance Industry.” Journal of Financial Service Research 39:119–144.10.1007/s10693-010-0094-3Search in Google Scholar

Shim, J. 2017. “An Investigation of Market Concentration and Financial Stability in Property- Liability Insurance Industry.” Journal of Risk and Insurance 84 (2):567–597.10.1111/jori.12091Search in Google Scholar

Shin, H., and R. M. Stulz. 1998. “Are Internal Capital Markets Efficient?.” Quarterly Journal of Economics May:531–552.10.1162/003355398555676Search in Google Scholar

Singhal, R., and Y. Zhu. 2013. “Bankruptcy Risk, Costs and Corporate Diversification.” Journal of Banking and Finance 37:1475–1489.10.1016/j.jbankfin.2011.11.019Search in Google Scholar

Stigler, G. L. 1964. “A Theory of Oligopoly.” Journal of Political Economy 72:44–61.10.1086/258853Search in Google Scholar

Stiroh, K. J. 2004. “Diversification in Banking: Is Noninterest Income the Answer?” Journal of Money, Credit, and Banking 36:853–882.10.1353/mcb.2004.0076Search in Google Scholar

Stiroh, K. J., and A. Rumble. 2006. “The Dark Side of Diversification: The Case of US Financial Holding Companies.” Journal of Banking and Finance 30:2131–2161.10.1016/j.jbankfin.2005.04.030Search in Google Scholar

Stock, J. H., J. H. Wright, and M. Yogo. 2002. “A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments.” Journal of Business and Economic Statistics 20:518–529.10.1198/073500102288618658Search in Google Scholar

Villalonga, B. 2004a. “Does Diversification Cause the “Diversification Discount”?” Financial Management 33:5–27.10.2139/ssrn.227828Search in Google Scholar

Villalonga, B. 2004b. “Diversification Discount or Premium? New Evidence from BITS Establishment-level Data.” Journal of Finance 59:479–505.10.2139/ssrn.253793Search in Google Scholar

Zanjani, G. 2002. “Pricing and Capital Allocation in Catastrophe Insurance.” Journal of Financial Economics 65:283–305.10.1016/S0304-405X(02)00141-1Search in Google Scholar

Published Online: 2017-6-29

© 2017 Walter de Gruyter GmbH, Berlin/Boston

Downloaded on 1.3.2024 from
Scroll to top button