This paper examines the response of managers of property-casualty insures to the differential costs and benefits of understanding the liability for outstanding claim losses. The primary hypothesis is that the incentive to underestimate the liability is a decreasing function of the insurer's actual financial position. Empirical tests suggest that managers of financially weak insurers bias downward their estimates of claim loss reserves relative to other insurers after controlling for exogenous economic factors. Evidence also reveals that managers of insurers ‘close’ to receiving regulatory attention understate reserve estimates to an even larger degree.

We examine whether transient institutional investors (i.e., institutions that trade actively to maximize short‐term profits) have information that allows them to predict a break in a string of consecutive quarterly earnings increases and thereby avoid the economically significant negative stock price response associated with the break announcement. We show that transient institutions predict the break at least one quarter in advance of the break quarter. We also provide evidence that is consistent with transient institutions obtaining information regarding the impending break from private communications with management.

Claim loss reserves, Insurance industry, Disclosures, Disclosure accuracy

This study investigates the effects of state taxes and regulation on an organizational structure decision for expanding property-casualty insurers (subsidiary versus license). Tests are conducted of the relation between the organizational structure of 2,335 property-casualty insurers and state tax and regulatory conditions in 1991. Evidence is provided that property-casualty insurers structure their cross-state expansion to mitigate both state tax and regulatory costs.

This study examines the association between chief financial officer (CFO) equity incentives and earnings management. Chief executive officer (CEO) equity incentives have been shown to be associated with accruals management and the likelihood of beating analyst forecasts (Bergstresser and Philippon, 2006; Cheng and Warfield, 2005). Because CFOs’ primary responsibility is financial reporting, CFO equity incentives should play a stronger role than those of the CEO in earnings management. We find that the magnitude of accruals and the likelihood of beating analyst forecasts are more sensitive to CFO equity incentives than to those of the CEO. Our evidence supports the Securities and Exchange Commission's (SEC) new disclosure requirement on CFO compensation.

A major governance problem in closely held corporations is the majority shareholders’ expropriation of minority shareholders. As a solution, legal and finance research recommends that the main shareholder surrender some control to minority shareholders via ownership rights. We test this proposition on a large data set of closely held corporations. We find that shared-ownership firms report a substantially larger return on assets and lower expense-to-sales ratios. These findings are robust to institutionally motivated corrections for endogeneity of ownership structure. We provide evidence on the presence of governance problems and the effectiveness of shared ownership as a solution in settings characterized by illiquidity of ownership.

We hypothesize that, in their annual accounting reports, propertycasualty insurers allocate premiums from multistate policies to reduce total state taxes. To test this prediction, we exploit the industry's unique state tax disclosures. We examine firm-level data, collected from the publicly available, statutory reports filed with each state government. Reported premiums at the insurer-state level, scaled by incurred losses, are regressed on state tax measures. Consistent with tax-motivated income shifting, we find the premiumloss ratio is decreasing in state tax rates. The negative relation is greatest for insurers specializing in multistate lines of business.

This paper provides evidence that insiders possess, and trade upon, knowledge of specific and economically significant forthcoming accounting disclosures as long as 2 years prior to the disclosure. Stock sales by insiders increase three to nine quarters prior to a break in a string of consecutive increases in quarterly earnings. Insider stock sales are greater for growth firms, before a longer period of declining earnings, and when the earnings decline at the break is greater. Consistent with avoiding an established legal jeopardy, there is little abnormal selling in the two quarters immediately prior to the break.

We investigate the relation between CEO compensation and accounting performance measures as a function of ownership structure. We use publicly-held property-liability insurers to consider the relation for firms with diffusely-held ownership and use privately-held property-liability insurers to consider the relation for firms with closely-held ownership. We find a significant positive association between return on assets and the level of compensation for publicly-held insurers. Consistent with optimal contracting theory, we find no such relationship for privately-held insurers. Results suggest that within closely-held firms CEO compensation is less based on objective measures like accounting information and more on subjective measures.

We examine whether analysts' incentives are associated with street earnings. Because prior research argues that analysts' incentives to promote stocks increase in the extent to which the stock exhibits glamour characteristics, we predict that analysts are more likely to make income‐increasing adjustments in determining street earnings for glamour stocks than for value stocks. We find that analysts are more likely to exclude expense items from street earnings for glamour stocks than for value stocks and that excluded expense items help predict future earnings for glamour stocks but not for value stocks. Overall, our results suggest that analysts' self‐interest influences street earnings and this self‐interest leads to street earnings that are less useful in predicting future earnings for glamour stocks.