Effects of stock exchange listing, family ownership, and family involvement on firm performances in the Thai non-life insurance businesses

Abstract

Most public limited companies are extensive and impactful to countries’ economy and their people, and therefore effective management in those companies is important. Previous studies have shown that conflicts of interest among companies' shareholders, managers, and creditors are one of the major causes of declining operational efficiency. Agency Theory is a forefront financial economic theory used for describing agency conflict problems along with approaches for conflict resolution. Mechanisms to help reduce agency conflicts include monitoring both within and outside a company. The board of directors and controlling shareholders are also the key internal monitoring tools, while the stock market, regulators, outside shareholders, and debt holders are the primary external monitoring apparatus. This study focuses on how external monitoring, particularly through stock markets, as well as how family-owned companies and family-managed businesses affect such performance dimensions as managerial discretion, corporate risk-taking, reinsurance demand, and financial performance in Thai non-life insurance businesses. The insurance industry stands out from others because of its unique characteristics and operations. For example, they have liabilities in the form of insurance reserves, receiving income in advance, mainly invested in securities, and merged customers and creditors functions (i.e., policyholders). Besides, policyholders have the right to claim the entity's liability to insurance companies before any other group. In addition, insurance is a business that is highly regulated in order to protect its policyholders against being exploited by other stakeholders. Thus, these unique characteristics result in conflicts of interest in the insurance business that is different from non-insurance ones. This study combines cross-sectional and time series data to create panel data. We can comprehend more clearly if we their combinarion includes observations about different cross-sections. After eliminating two listed reinsurance firms, one listed life insurance company, companies with incomplete information, and companies with discontinued operations, we have 45 non-life insurance companies remaining from 2012 to 2016 Our study divides the insurance companies into listed, non-listed, family, non-family, and family companies with the owner involved and uninvolved in the management. Such distinct groups enable us to investigate how each of them affects issues of agency conflicts, which brings us to three crucial research questions: 1) How do different monitoring of listed and non-listed companies affect managerial discretion, corporate risk-taking, reinsurance demand, and firm performance? 2) How do different families and non-families companies affect these same variables? 3) How do different companies with the owner involved and uninvolved in management affect those variables? Additionally, since there are some unique features in our study findings, unlike those found in other non-insurance industries, the insurance sector may also be classified into life and non-life groups, the latter of which is under our research. Our findings demonstrate that listed insurance companies have greater managerial latitude than do non-listed ones due to their diverse business lines, which require greater prudent judgment in premium and claim settings. Managers with greater managerial discretion may have more opportunities to maximize their own wealth rather than that of their shareholders. Besides, due to an insurer’s higher risk-taking actions, agency conflicts between its owner and policyholders are more common in listed insurers than in non-listed insurers. For instance, listed insurers have higher underwriting risk than non-listed ones, despite their relatively lower leverage risk, because of their lower premiums due to their firm size (i.e., economies of scale). Reinsurance and firm performance, however, are the same for both listed and non-listed groups. As a result, even though listed insurance companies are subject to more stringent regulation than non-listed ones, our findings indicate that agency conflicts are more likely to occur in listed companies than in non-listed firms, especially the conflict between owners and policyholders. Instead of protecting the policyholders, the stock market's primary regulatory framework places higher priority on investor protection over other stakeholders’ interests. According to our findings, family-owned insurance companies perform similarly to non-family-owned firms regarding managerial discretion, reinsurance demand, and firm performance. However, compared to non-family-owned insurers, family-owned companies show lower underwriting and investment risks but higher leverage risk. A higher degree of financial leverage in family-owned companies implies that they have lower capital reserves associated with lower underwriting and investment risks. Lower risk-taking actions in family-owned companies are characterized by their controlling family’s planning to pass thebusiness down toward next generations; family-owned businesses usually have a clear objective concerning their companies’ long-term viability and thus invest more relatively to non-family-owned firms do. As a result, compared to non-family-owned frms, agency conflicts between owners and policyholders are smaller in family-owned companies. Our findings also show that when shareholders of an insurance firm participates in its managerial decisions or activities, they tend to lend more impacts on the business than when they merely own shares. Owner’s involvement in management helps reduce managerial discretion more effectively compared to no owner’s involvement. Additionally, in businesses where owners are actively involved in management, the interests of the owners and shareholders are aligned. As a result, while leverage, underwriting, and overall risks are similar between companies with and without owner-managers, the former tend to assume higher investment risks to maximize owners’ wealth. Moreover, Our findings indicate that insurance companies with high ownership concentration (e.g., closely-held firms) are more inclined to accept greater risk exposres, particularly underwriting and investment risks. Hence, higher expenses borne by policyholders could come from these findings. Furthermore, the demand for reinsurance is lower for firms whose the shareholders own a sizable portion of the stock. Those firms may regard reinsurance more as a superfluous cost than a risk-diversification benefit, thereby making them decide to keep diversfiable risks to themselves, which effectively lowers their demand for reinsurance. Also, our findings point out that lower firm performance is the result of higher ownership concentration. It can be shown that there are agency concerns in insurance companies when their owners hold a large part of a company due to higher risk-taking and weaker firm performance. When insurance firms with high ownership concentration are listed on the stock exchange, they exhibit less underwriting risk-taking and seek more reinsurance so as to reduce agency conflicts. As a result, we can view stock-market monitoring as an essential governance tool for minimizing agency conflicts, especially in high-ownership concentration firms. All of our research findings lead us to conclude that listed insurance companies are more likely to have higher agency conflicts than non-listed ones. Because listed firms are more incentivized to assume more risks and expropriate wealth from policyholders toward shareholders or managers due to the firms’ greater managerial discretion, stock-market regulators should pay closer attention to such risk-shifting behavior. On the other hand, family-managed insurance firms experience fewer of those risk-taking issues. As a result, insurance-industry regulators should take into account those factors when creating a legal environment, establishing suitable regulatory policies, and deploying their enforcement actions. The findings of our study are still useful for investors in spite of the fact that they show no differences in firm performance among non-life insurance groups, including listed and non-listed firms, family-owned and non-family-owned firms, and family-managed and non-family-managed firms. Even though insurance firms’ ownership structures do not affect firm performance, their ownership concentration does positively affect their agency costs through fewer business lines, better monitoring, decreased leverage risk-taking decision, and increased reinsurance demand.