Institutional Ownership Stability and Risk Taking: Evidence from the Life-Health Insurance Industry

We investigate the relationship between risk taking of life-health (LH) insurers and health (LH) insurers and stability of their institutional ownership within a simultaneous equation system model. Several results stability of their institutional ownership within a simultaneous equation system model. Several results are obtained. First, stable institutional ownership is associated with lower total risk of LH insurers, supporting the prutudent-man law hypothesis. Second, when investors are sorted in terms of stringency of the prudent-man restrictions, their negative effect on risk holds for all, except insurance companies, as owners of LH insurers. Third, large institutional owners do not raise the riskiness of the investee-firms, as proposed by the large shareholder hypothesis. Fourth, institutional owners reduce riskiness of the investees through reduction their leverage and underwriting risks, though they increase their investment risk, in which they have greater expertise. These findings have important regulatory, managerial and investment implications.