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The Relative Informativeness of Analysts’ Stock Return Forecasts and Rating Changes for Insurance Companies

  • Leon Chen
  • Steven W Pottier
Original Article

Abstract

Stock return forecasts and financial strength ratings are supposed to represent concise and complete summary measures of the financial prospects of publicly traded insurance companies. The key questions for investors and other parties who may choose to rely on these metrics are whether they help predict actual stock returns and the relative informativeness of each metric. Ours is the first study to provide empirical evidence on these questions for insurers. Our forecasted stock returns are computed from target stock prices, which represent an explicit estimate of a firm’s future market value. We find that the mean 12-month-ahead (forecasted) stock return in our sample is around 20 per cent, while the actual mean annualised stock return is around 10 per cent, suggesting analysts’ optimism, inaccuracy, or some of both. Current period forecasted stock returns are positively correlated with past forecasted stock returns, and negatively correlated with past actual stock returns. Current period forecasted stock returns exhibit a strong positive association with future period actual stock returns, suggesting that forecasted stock returns are useful predictors of future actual stock returns. Furthermore, an increase in actual or forecasted stock returns decreases the likelihood of a rating downgrade, but has little relation to rating upgrades. These results support the usefulness of stock return forecasts to investors and rating agents.

Keywords

insurer rating stock return target price analyst forecast 

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Copyright information

© The International Association for the Study of Insurance Economics 2015

Authors and Affiliations

  • Leon Chen
    • 1
  • Steven W Pottier
    • 2
  1. 1.Department of FinanceCollege of Business, Minnesota State University at MankatoMankatoU.S.A.
  2. 2.Department of InsuranceLegal Studies, and Real Estate, Terry College of Business, University of GeorgiaAthensU.S.A.

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