Corporate Diversification, Firm Size, Organizational Culture and Performance of Insurance Companies in Kenya

Abstract

Local and regional insurance markets have not been immune to global business failure, which has led insurance companies to choose diversification as a means of growing their clientele, boosting profits, and ensuring their continued existence. Still, it is inconclusive on if diversified firms perform better or the already performing firms start to think of diversification as a tool to reinvest excess returns, thus posing a scenario of dual causality. Studies have provided varied evidence stemming from variations in measurement of variables, models adopted or choice of variables as well as contextualization disparities. This research aimed at establishing the relationship among corporate diversification (CDV), firm size (FS), organizational culture (OC) and performance of insurance companies. The study first assessed the linkage of CDV and performance; then explored intervening effect of firm size on CDV- performance relationship. Thirdly, the moderation effect of OC on the link between CDV and performance was tested and lastly joint effect of the three variables on performance and bidirectional effect of performance and CDV were tested. To address the objectives, five hypotheses were tested on a population of fifty-six (56) registered insurance companies in Kenya. Positivist research philosophy and descriptive research design were applied. Diagnostic tests done on the data were normality, linearity, multicollinearity and heteroscedasticity. Preliminary tests included Cronbach alpha, mean, skewness and kurtosis and correlation. Simple linear and hierarchical multiple linear regression were applied to test four hypotheses while the reversal effect was tested by SEM. Secondary data for all companies was available and the response rate for OC was 96.4%. Using Jacquemin-Bermy entropy measure of diversification and finding were as follows: there was a statistically significant link between CDV and the two indicators of performance (ROA and Market share); there is no significant intervening effect of firm size on the relationship between CDV and financial performance. Firm size has partial intervening effect on CDV and NFP linkage. CDV and financial performance linkage is moderated by OC; OC had no moderation effect on CDV and non-financial performance linkage; there is significant combined effect of CDV, FS and OC on financial performance and there is a statistically significant combined effect of CDV, FS and OC on NFP; financial performance and CDV had a dual causal effect. The study adds to knowledge in CDV, firm size organizational culture and performance by showing that the linkage of CDV and NFP of insurance companies is not direct but rather is mediated by firm size. This further alleviates the controversy existing in literature. Findings can guide insurance managers in validating diversifying insurance undertakings. The study extends on predictive insights of MPT in conceptualization, informing and understanding the linkage of CDV and firm performance. Government and insurance regulators such as IRA can use the findings to guide the regulation particularly when setting capital limits to reduce unhealthy competition. By assessing the diversification index that is most appropriate for each of the other financial service and non-service industries, similar research can be expanded to offer more insights into the relationships.