Get the Balance Right: A Simultaneous Equation Model to Analyze Growth, Profitability, and Safety

Martin Eling, Ruo Jia () and Philipp Schaper ()

No 1716, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: Extant literature suggests that the relationships among growth, profitability, and safety are reciprocal. Consequently, we develop a simultaneous equation model to test the three relationship pairs. Analyzing eleven years of data for 1,988 European insurance companies, we find that moderate firm growth has a positive impact on profitability; however, extremely high growth reduces profitability. Moderate firm growth also reduces firm risk. In addition, we document that less profitable companies are risk-seeking, a result in line with prospect theory. The longitudinal analysis illustrates that firms initially prioritizing profitability over growth are more likely to reach the ideal state of “profitable growth”.

Keywords: firm performance; simultaneous equation model; goal conflicts; financial services; insurance (search for similar items in EconPapers)
Pages: 34 pages
Date: 2017-10
New Economics Papers: this item is included in nep-bec, nep-rmg and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2017:16

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