Changes in Ownership Structure: Theory and Evidence from Life Insurer Demutualizations

Mayers and Smith (1981) extended Jensen and Meckling’s (1976) seminal work on organizational structure and agency theory, and argued that the costs of controlling the owner-manager conflict are higher for mutual insurers than for stock insurers because of fewer and less effective monitoring and control mechanisms in place for mutuals. Although greater access to capital is an oft-cited reason for demutualization, and the need for access to capital likely is justifiable, findings indicate that demutualizing insurers had higher ratios of surplus to assets than other mutuals that did not convert to the stock form. An empirical examination of several organizational structure hypotheses indicates that the level of free cash flow is significantly related to the likelihood of demutualization, and demutualization may be motivated by expropriation or by attempts to control associated agency costs.