Discretionary and Non-Discretionary Revisions of Loss Reserves by Property-Casualty Insurers: Differential Implications for Future Profitability, Risk and Market Value
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.Get Access
We develop and estimate a PC-industry specific model in which proxies for both discretion and non-discretion are used to partition loss reserve revisions into discretionary and non-discretionary components. The use of such proxies enables us to test directional hypotheses about the relations between the revision components and future profitability, risk and market value. We predict and find that discretionary revisions are negatively associated with future profitability, positively associated with firm risk, and negatively associated with market-to-book ratios. We predict and find that non-discretionary revisions are positively associated with future profitability and risk but are not associated with market-to-book ratios.
- AICPA Special Committee on Financial Reporting. (1994). Improving Business Reporting—A Customer Focus: Meeting the Informational Needs of Investors and Creditors. New York: AICPA.
- Anthony, J., and K. Petroni. (1997). “Accounting Estimation Disclosures and Firm Valuation in the Property-Casualty Insurance Industry.” Journal of Accounting, Auditing, and Finance (Summer), 257–281.
- Beaver, W., C. Eger, S. Ryan, and M. Wolfson. (1989). “Financial Reporting, Supplemental Disclosures, and Bank Share Prices.” Journal of Accounting Research 27(Autumn), 157–178.
- Beaver, W., and E. Engel. (1996). “Discretionary Behavior with Respect to Allowances for Loan Losses and the Behavior of Security Prices.” Journal of Accounting and Economics 22, 177–206.
- Beaver, W., P. Kettler, and M. Scholes. (1970). “The Association Between Market Determined and Accounting Determined Risk Measures.” The Accounting Review (October), 654–682.
- Beaver, W., and McNichols, M. (1998). “The Characteristics and Valuation of Loss Reserves of Property-Casualty Insurers.” Review of Accounting Studies, 73–95.
- Best's. (Annual 1985–1994). Insurance Reports: Property-Casualty Edition. Oldwick, N.J: A.M.Best.
- Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. (1999). Report and Recommendations. New York Stock Exchange/National Association of Securities Dealers.
- Fama, E., and K. French. (1992). “The Cross-Section of Expected Stock Returns.” Journal of Finance (June), 427–465.
- Feltham, G., and J. Ohlson. (1995). “Valuation and Clean Surplus Accounting for Operating and Financial Activities.” Contemporary Accounting Research (Spring), 689–731.
- Gart, A. (1994). Regulation, Deregulation, Reregulation. New York: John Wiley & Sons.
- Grace, E. (1990). “Property-Liability Insurer Reserve Errors: A Theoretical and Empirical Analysis.” Journal of Risk and Insurance 57, 28–46.
- Guay, W., S. P. Kothari, and R. Watts. (1996). “A Market-Based Evaluation of Discretionary Accruals Models.” Journal of Accounting Research 34(Supplement), 83–105.
- Hamada, R. “The Effect of the Firm's Capital Structure on the Systematic Risk of Common Stocks.” Journal of Finance (May), 435–452.
- Hill, R. (1979). “Profit Regulation in Property-Liability Insurance.” Bell Journal of Economics 10, 172–191.
- Jones, J. (1991). “Earnings Management During Import Relief Investigations.” Journal of Accounting Research (Autumn), 193–228.
- Nelson, K. (1997). “The Discretionary Use of PresentValue-Based Measurements by Property-Casualty Insurers.” Research Paper No. 1428, Graduate School of Business, Stanford University.
- Penalva, F. (1998). “Loss Reserves and Accounting Discretion in the Property-Casualty Insurance Industry.” Working paper, University of California at Berkeley.
- Penman, S. (1991). “An Evaluation of Accounting Rate of Return.” Journal of Accounting, Auditing, and Finance (Spring), 233–256.
- Petroni, K. (1992). “Optimistic Reporting in the Property-Casualty Insurance Industry.” Journal of Accounting and Economics (December), 485–508.
- Petroni, K., and M. Beasley. (1996). “Errors in Accounting Estimates and their Relation to Audit Firm Type.”Journal of Accounting Research (Spring), 151–171.
- Prais, S., and C. Winsten. (1954). “Trend Estimators and Serial Correlation.” Cowles Commission Discussion Paper No. 383, Chicago.
- Ryan, S. (1997). “A Survey of Research Relating Accounting Numbers to Systematic Equity Risk, with Implications for Risk Disclosure Policy and Future Research.” Accounting Horizons (June), 82–95.
- Sommer, D. (1996). “The Impact of Firm Risk on Property-Liability Insurance Prices.” Journal of Risk andInsurance 63, 501–514.
- Subramanyam, K. (1996). “The Pricing of Discretionary Accruals.” Journal of Accounting and Economics 22, 249–181.
- Wahlen, J. (1994). “The Nature of Information in Commercial Bank Loan Loss Disclosures.” Accounting Review (July), 455–478.
- Winter, R. (1988). “The Liability Crisis and the Dynamics of Competitive Insurance Markets.” Yale Journal of Regulation (Summer), 455–499.
- Discretionary and Non-Discretionary Revisions of Loss Reserves by Property-Casualty Insurers: Differential Implications for Future Profitability, Risk and Market Value
Review of Accounting Studies
Volume 5, Issue 2 , pp 95-125
- Cover Date
- Print ISSN
- Online ISSN
- Kluwer Academic Publishers
- Additional Links