Exploring the nonlinear effect of size on profitability: evidence from an insurance brokerage industry in an emerging market

Abstract

Purpose – This study examines the possible nonlinear effect of size on stakeholder and shareholder profitability in the Ghanaian insurance brokerage industry. Design/methodology/approach – This study employs a panel dataset of 64 Ghanaian insurance brokerage firms spanning 2011–2015. Static [ordinary least squares (OLS), fixed effect and random effect and dynamic (two-step generalized method of moments (GMM))] estimation techniques are employed to analyze the data. Findings – The study finds the existence of both economies and diseconomies of scale and scope theories in the Ghanaian insurance brokerage industry confirming the existence of nonlinear nexus between size and performance. This finding is consistent for both stakeholder and shareholder profit performance. Thus, the results show that size improves profitability of insurance brokerage firms, but beyond a certain threshold, the relationship turns negative as size negatively affects profitability. Practical implications – The research findings have implications for both policy and research; the study recommends that Ghanaian brokerage managers should understand that not all growth is good and exercise a duty of care when applying growth strategies by monitoring size effect on performance so as not to go beyond the inflection point. Further research can be done to examine this effect in other contexts, timeframes and jurisdictions. Originality/value – This research is unique in that it employs a panel dataset consisting of 96% of insurance brokerage firms in Ghana whilst employing both static and nonstatic regression models to examine the effect of size. The research analysis adopted is robust, and the findings are significant. Also, the lack of empirical studies on the operations and dealings of auxiliary institutions such as the insurance brokerage firms adds value to this research.