Board size and firm performance in the property-liability insurance industry

Abstract

Extant research on non-financial service firms indicates that board size is a key determinant of firm performance. Property-liability (P&L) insurers, however, face a different set of agency costs and a more intense regulatory environment than most non-financial firms. Both of these factors were reinforced by the implementation of the Financial Services Modernization Act in 2000. We document a significant inverse relation between publicly traded P&L insurer performance and board size in the post-Financial Services Modernization Act period. Publicly traded P&L insurer performance, measured by market-to-book ratio, return on revenues, and the operating ratio, was enhanced for firms with smaller board sizes in 2000 and 2001. Ironically, we find that publicly traded P&L insurers on average increased board size in 2000 and 2001. In a post-Financial Services Modernization Act environment, board size appears to be related to publicly traded P&L insurer performance, but more research is necessary to develop a complete understanding of its role in P&L insurer corporate governance.

Citation

Pacini, C., Hillison, W. and Marlett, D. (2008), "Board size and firm performance in the property-liability insurance industry", Chen, A.H. (Ed.) Research in Finance (Research in Finance, Vol. 24), Emerald Group Publishing Limited, Leeds, pp. 249-285. https://doi.org/10.1016/S0196-3821(07)00210-9