Do Analysts Account for Accruals? Evidence from the Insurance Industry. (5th March 2021)

• Record Type: Journal Article
• Authors: Baik, Bok; Kim, Young Jun; Roh, Yongoh
• Is Part Of: Asia-Pacific journal of financial studies. Volume 50:Number 1(2021)
• Page Start: 79
• Page End: 109
• Publication Date: 2021-03-05
• Subjects: Property‐casualty insurer -- Analyst forecast -- Accruals -- Supplemental disclosure -- Loss reserve; Pacific Area -- Economic conditions -- Periodicals; Finance -- Asia -- Periodicals; Finance -- Pacific Area -- Periodicals; Asia -- Economic conditions -- Periodicals; 332.09505
• DOI: 10.1111/ajfs.12326
• Languages: English
• ISSNs: 2041-9945

Abstract

Abstract: Property‐casualty (PC) insurers are mandated by the Securities and Exchange Commission (SEC) to report managers' revisions of loss reserve estimates ("development") in 10‐K supplemental disclosures. Using manually collected PC insurers' development, we examine whether analysts' earnings forecasts incorporate information in development. We initially show that development has incremental power to predict insurers' future profitability. Although analysts revise earnings forecasts in response to the updates on development in 10‐K filings, their forecast errors are positively related to development. We also find that analysts exhibit greater errors for firms that exert more discretion over development. Overall, our findings suggest that analysts do not fully incorporate the information in managers' estimates.