When does cross‐border acquisition of insurance firms lead to value creation?

Abstract

Purpose

The purpose of this paper is to focus on international acquisitions that took place in the insurance sector by US‐based firms in the years 1997‐2003 and their impact on shareholder wealth.

Design/methodology/approach

The study sample is based on 52 international acquisitions in 24 countries undertaken by US firms in the insurance industry during the years 1997‐2003. The event‐study methodology is used to verify the impact of international acquisition announcements on an insurance firm's shareholder wealth. Cross‐sectional regression analysis is used to determine the importance of host country factors.

Findings

Overall results of this study show that firms undertaking overseas acquisitions face statistically insignificant negative market returns, indicating the market neither rewards nor penalizes such firms. The market returns faced by firms during such acquisitions tend to vary by the degree of wealth of the host country, amount of bilateral trade between host and home country, extent of potential liabilities of foreignness (LOF) faced by the firm, and economies of scope.

Originality/value

An important contribution of this study is that it indicates how these returns in insurer acquisitions are influenced by country characteristics. Insurers are likely to face relatively higher positive returns while seeking entry into countries with large size markets and which have extensive trade relationships with the US insurers are also likely to face negative returns when entering markets that have potential pitfalls of LOF. The market does see higher risk in acquisitions made in countries characterized by greater differences in culture, environment, legal systems, and geographic distance. Additionally, there is limited evidence indicating that firms gaining scope economies might be able to reduce the negative impact of LOF. Therefore, the conventional phrase, “look before you leap” would be apt for insurers planning acquisitions in overseas markets.

Citation

Elango, B. (2006), "When does cross‐border acquisition of insurance firms lead to value creation?", Journal of Risk Finance, Vol. 7 No. 4, pp. 402-414. https://doi.org/10.1108/15265940610688964