Skip to main content
SpringerLink
Log in

Do Stock Prices of Property Casualty Insurers Fully Reflect Information about Earnings, Accruals, Cash Flows, and Development?

  • Published:
Review of Accounting Studies Aims and scope Submit manuscript

Abstract

This paper examines whether the stock prices of property and casualty (P&C) insurers fully reflect information contained in earnings, cash flows and accruals, and one particular accrual—development of loss reserves. The reserve for policy losses is a major accrual for P&C firms, requires substantial judgment and is the subject of unique disclosures that reveal the ex post error in management estimates. We find that investors underestimate the persistence of cash flows and overestimate the persistence of accruals for P&C insurers, but our evidence suggests the market does not underestimate the persistence of the development accrual.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Anthony, J. and J. Petroni. (1997). “Accounting Estimation Disclosures and FirmValuation in the Property-Casualty Insurance Industry.” Journal of Accounting, Auditing and Finance (Summer), 257-281.

  • Ball, R. and E. Bartov. (1998). “How Naïve is the Stock Market's Use of Earnings Information?” Journal of Accounting and Economics (June), 319-337.

  • Barber, B., R. Lehavy, M. McNichols and B. Trueman. (2000). “Can Investors Profit from the Prophets? Consensus Analysts Recommendations and Stock Returns.” The Journal of Finance (forthcoming, 2001).

  • Barth, M., W. Beaver, J. Hand and W. Landsman. (1999). “Accruals, Cash Flows and Equity Values.” Review of Accounting Studies (December), 205-229.

  • Beaver, W. (1998). Financial Reporting: An Accounting Revolution. 3rd ed. New Jersey: Prentice Hall.

    Google Scholar 

  • Beaver, W. and M. McNichols. (1998). “The Characteristics and Valuation of Loss Reserves in the Property and Casualty Insurance Industry,” Review of Accounting Studies 3(1/2), 73-95.

    Google Scholar 

  • Belsey, D. A., E. Kuh and R. E. Welsch. (1980). Regression Diagnostics. New York: John Wiley & Sons, Inc.

    Google Scholar 

  • Bernard, V. L. and J. Thomas. (1990). “Evidence That Stock Prices Do Not Fully Reflect the Implications of Current Earnings for Future Earnings.” Journal of Accounting and Economics 13 (December), 305-340.

    Google Scholar 

  • Collins, D. and P. Hribar. (2000). “Errors in Estimating Accruals: Implications for Empirical Research.”Working Paper, University of Iowa.

  • Dechow, P. M. (1994). “Accounting Earnings and Cash Flows as Measures of Firm Performance: The Role of Accounting Accruals.” Journal of Accounting and Economics 18, 3-42.

    Google Scholar 

  • Dechow, P. M., S. P. Kothari and R. L. Watts. (1998). “The Relation between Earnings and Cash Flows.” Journal of Accounting and Economics 25, 133-168.

    Google Scholar 

  • Foster, G., C. Olsen and T. Shevlin. (1984). “Earnings Releases, Anomalies, and the Behavior of Security Returns.” Accounting Review 59 (October), 574-603.

    Google Scholar 

  • Lundholm, R. (2000). “Reporting on the Past: A New Approach to Improving Accounting Today.” Accounting Horizons (forthcoming, 2001).

  • McNichols, M. and G. P. Wilson. (1988). “Evidence of Earnings Management from the Provision for Bad Debts.” Journal of Accounting Research (Supplement), 1-31.

  • Mishkin, F. (1983). A Rational Expectations Approach to Macroeconometrics: Testing Policy Effectiveness and Effects Markets Models. Chicago, Illinois: University of Chicago Press for the National Bureau of Economic Research.

    Google Scholar 

  • Nelson, K. (2000). “The Discretionary Use of Present Value-Based Measurements by Property-Casualty Insurers.” The Accounting Review (January), 115-138.

  • Petroni, K. (1992). “Optimistic Reporting in the Property-Casualty Insurance Industry.” Journal of Accounting and Economics 15, 485-508.

    Google Scholar 

  • Petroni, K., S. Ryan and J. Wahlen (2000). “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, 95-125.

  • Sloan, R. (1996). “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?” The Accounting Review 71, 289-315.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Graduate School of Business, Stanford University, 518 Memorial Way, Stanford, CA, 94305

    William H. Beaver & Maureen F. McNichols

Authors
  1. William H. Beaver
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Maureen F. McNichols
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Beaver, W.H., McNichols, M.F. Do Stock Prices of Property Casualty Insurers Fully Reflect Information about Earnings, Accruals, Cash Flows, and Development?. Review of Accounting Studies 6, 197–220 (2001). https://doi.org/10.1023/A:1011662825164

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1011662825164

Search

Navigation