[The property-liability (P&L) insurance industry has used statutory accounting principles (SAP) primarily for measuring and monitoring solvency. In recent years disputes have arisen concerning differences between SAP and the Generally Accepted Accounting Principles (GAAP), and their applications to the P&L industry. The distinguishing characteristics of SAP include the use of market prices for valuation of equity portfolios of P&L firms, and the mismatching of revenues and expenses. The present study compares SAP with GAAP and with an alternative accounting procedure that might be called market value- and cash-flow-based principles (MVA). The main characteristics of MVA are the use of market data for valuation of both stock and bond portfolios, and the use of cash flow for earnings. The purpose of this study is to determine which of the three accounting procedures provides better information for monitoring solvency and identifying financial distress. Thus, the major hypothesis of this study is that increased availability of market-based data and increased reliance on cash-flow figures yield incremental benefits in predicting financial insolvency in the P&L industry. Some empirical evidence with respect to the relative efficacy of SAP has been reported for the late 1960s and the 1970s. These earlier studies used multidiscriminant analysis (MDA) and suffered from some methodological problems. The present study extends previous analyses by using relatively more comprehensive accounting data in logit analysis. A sample of 105 P&L companies that failed during the period 1975-1987 is used in this study. The insolvent insurers were matched with 106 P&L insurers selected at random from A. M. Best files. The solvent and insolvent samples were each split into an estimation sample and a holdout sample. The results of this study are reported for one and three years prior to insolvency. Univariate analysis and multivariate logit analyses are presented. The hypothesis that alternative accounting procedures provide similar classification results was rejected in this paper for both the estimation and holdout samples and for the one and three years prior to the onset of insolvency. The analyses also considered misclassification costs, prior probabilities, and choice-based sample biases; both MVA and SAP procedures outperformed GAAP procedures for all classification and prediction (validation) comparisons. MVA slightly dominated SAP procedures for several comparisons of classification and prediction, but the differences were often not significant. Thus, empirical evidence presented suggests that the SAP and the MVA provide classification and prediction of insolvencies in the P&L insurance industry over and above that provided by the GAAP.]

Compares the usefulness of three different accounting procedures for the prediction of insolvency among property-liability insurers. Statutory accounting principles; Generally accepted accounting principles; Market value- and cash-flow-based principles.

From 1994 to 1998, Bradshaw (2004) finds that analysts' stock recommendations relate negatively to residual income valuation estimates (scaled by current price) but positively to valuation heuristics based on the price-to-earnings-to-growth ratio and long-term growth. These results are surprising, especially considering that future returns relate positively to residual income valuation estimates and negatively to heuristics. Using a large sample of analysts for the 1993–2005 period, we consider whether recent regulatory reforms affect this apparent inconsistent analyst behavior. Consistent with the intent of these reforms, we find that the negative relation between analysts' stock recommendations and residual income valuations is diminishing following regulations. We also show that residual income valuations, developed using analysts' earnings forecasts, relate more positively with future returns. However, we document that stock recommendations continue to relate negatively with future returns. We conclude that recent regulations have affected analysts' outputs—forecasted earnings and stock recommendations—but investors should be aware that factors other than identifying mispriced stocks continue to influence how analysts recommend stocks.