Skip to main content

Please enter a keyword and click the arrow to search the site

The dynamics of related diversification: Evidence from the health insurance industry following the Affordable Care Act

Journal

Strategic Management Journal

Subject

Strategy and Entrepreneurship

Authors / Editors

Ethiraj S;Zhou Y;Yang W

Biographies

Publication Year

2022

Abstract

Research Summary We provide a theory of when relatedness will encourage both diversifying entry and post-entry exit. Our formal model reveals two channels through which resource sharing in combination with firm capabilities affects diversifying entry and post-entry exit. Facing business opportunities in a new segment, low capability firms from a more related segment expect to benefit from more synergies and are therefore more likely to enter than firms with similar capability but from less related segments. Post entry, unfavorable shocks in the new segment tighten the survival criteria and drive some more related but low capability firms out. These predictions are supported using data on U.S. health insurance firms' entry into and exit from the Affordable Care Act market from 2013 to 2017. Managerial Summary When would factors that favor related diversifiers' entry into a new business segment also encourage their exit post-entry? Using data on U.S. health insurance firms' entry into and exit from the Affordable Care Act (ACA) market from 2013 to 2017, we find that more related diversifiers (i.e., insurers offering Medicaid), especially the low capability ones, are more likely to enter ACA. However, facing cost shocks in the new segment, more related diversifiers, especially the low capability ones, are more likely to exit than less related diversifiers (i.e., insurers offering no Medicaid). This is consistent with our formal model that predicts a selection at entry that favors related diversifiers due to expected synergies and an adverse selection post-entry against low capability related diversifiers.

Keywords

Resources; Capability; Diversification; Entry; Exit; Healthcare

Available on ECCH

No


Select up to 4 programmes to compare

Select one more to compare
×
subscribe_image_desktop 5949B9BFE33243D782D1C7A17E3345D0

Sign up to receive our latest news and business thinking direct to your inbox

×

Sign up to receive our latest course information and business thinking

Leave your details above if you would like to receive emails containing the latest thought leadership, invitations to events and news about courses that could enhance your career. If you would prefer not to receive our emails, you can still access the case study by clicking the button below. You can opt-out of receiving our emails at any time by visiting: https://london.edu/my-profile-preferences or by unsubscribing through the link provided in our emails. View our Privacy Policy for more information on your rights.