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

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  • Eling, Martin
  • Jia, Ruo
  • Schaper, Philipp

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”.

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  • Eling, Martin & Jia, Ruo & Schaper, Philipp, 2017. "Get the Balance Right: A Simultaneous Equation Model to Analyze Growth, Profitability, and Safety," Working Papers on Finance 1716, University of St. Gallen, School of Finance.
    • Handle: RePEc:usg:sfwpfi:2017:16
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    firm performance; simultaneous equation model; goal conflicts; financial services; insurance;
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