IDEAS home Printed from https://ideas.repec.org/a/bla/acctfi/v61y2021i4p5341-5376.html
   My bibliography  Save this article

The informativeness of embedded value reporting to stock price

Author

Listed:
  • Derrick W. H. Fung
  • David Jou
  • Ai Ju Shao
  • Jason J. H. Yeh

Abstract

This paper examines the informativeness of embedded value reporting to stock price by investigating the cross‐sectional variations in life insurers’ price to embedded value ratios. By conducting variance decomposition analysis on a dataset provided by Morgan Stanley, we find that 15 percent (40 percent) of the difference between embedded value and stock price can be explained by growth opportunities and future stock returns in the short (long) run. One‐third and two‐thirds of the unexplained variation are attributed to firm‐ and country‐specific factors, respectively. The above findings provide investors with a better understanding of the value relevance of embedded value reporting.

Suggested Citation

  • Derrick W. H. Fung & David Jou & Ai Ju Shao & Jason J. H. Yeh, 2021. "The informativeness of embedded value reporting to stock price," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5341-5376, December.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:4:p:5341-5376
    DOI: 10.1111/acfi.12761
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/acfi.12761
    Download Restriction: no
    File URL: https://libkey.io/10.1111/acfi.12761?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jiang, Xiaoquan & Lee, Bong-Soo, 2007. "Stock returns, dividend yield, and book-to-market ratio," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 455-475, February.
    2. Black, Angela J. & McMillan, David G., 2006. "Asymmetric risk premium in value and growth stocks," International Review of Financial Analysis, Elsevier, vol. 15(3), pages 237-246.
    3. Timothy K. Chue, 2015. "Understanding Cross†Country Differences in Valuation Ratios: A Variance Decomposition Approach," Contemporary Accounting Research, John Wiley & Sons, vol. 32(4), pages 1617-1640, December.
    4. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    5. Nicole El Karoui & Stéphane Loisel & Jean-Luc Prigent & Julien Vedani, 2017. "Market inconsistencies of the market-consistent European life insurance economic valuations: pitfalls and practical solutions," Post-Print hal-01242023, HAL.
    6. Baolei Qi & Liuchuang Li & Qing Zhou & Jinghui Sun, 2017. "Does internal control over financial reporting really alleviate agency conflicts?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(4), pages 1101-1125, December.
    7. Jonathan A. Milian, 2015. "Unsophisticated Arbitrageurs and Market Efficiency: Overreacting to a History of Underreaction?," Journal of Accounting Research, Wiley Blackwell, vol. 53(1), pages 175-220, March.
    8. Paulo Maio, 2014. "Another Look at the Stock Return Response to Monetary Policy Actions," Review of Finance, European Finance Association, vol. 18(1), pages 321-371.
    9. Xiaojun Chu & Chongfeng Wu & Jianying Qiu, 2016. "A nonlinear Granger causality test between stock returns and investor sentiment for Chinese stock market: a wavelet-based approach," Applied Economics, Taylor & Francis Journals, vol. 48(21), pages 1915-1924, May.
    10. Edward J. Riedl & George Serafeim, 2011. "Information Risk and Fair Values: An Examination of Equity Betas," Journal of Accounting Research, Wiley Blackwell, vol. 49(4), pages 1083-1122, September.
    11. Rebecca Chung-Fern Wu & Audrey Wen-Hsin Hsu, 2011. "Value Relevance of Embedded Value and IFRS 4 Insurance Contracts," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 36(2), pages 283-303, April.
    12. George Serafeim, 2011. "Consequences and Institutional Determinants of Unregulated Corporate Financial Statements: Evidence from Embedded Value Reporting," Journal of Accounting Research, Wiley Blackwell, vol. 49(2), pages 529-571, May.
    13. Thompson, Samuel B., 2011. "Simple formulas for standard errors that cluster by both firm and time," Journal of Financial Economics, Elsevier, vol. 99(1), pages 1-10, January.
    14. Joseph Engelberg & R. David Mclean & Jeffrey Pontiff, 2018. "Anomalies and News," Journal of Finance, American Finance Association, vol. 73(5), pages 1971-2001, October.
    15. Erin Henry, 2018. "The Information Content of Tax Expense: A Discount Rate Explanation," Contemporary Accounting Research, John Wiley & Sons, vol. 35(4), pages 1917-1940, December.
    16. Jeffrey L. Callen, 2009. "Shocks to Shocks: A Theoretical Foundation for the Information Content of Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 26(1), pages 135-166, March.
    17. Liu, Dehong & Gu, Hongmei & Xing, Tiancai, 2016. "The meltdown of the Chinese equity market in the summer of 2015," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 504-517.
    18. Art Durnev & E. Han Kim, 2005. "To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation," Journal of Finance, American Finance Association, vol. 60(3), pages 1461-1493, June.
    19. Jeffrey L. Callen & Dan Segal, 2004. "Do Accruals Drive Firm‐Level Stock Returns? A Variance Decomposition Analysis," Journal of Accounting Research, Wiley Blackwell, vol. 42(3), pages 527-560, June.
    20. Joanne Horton & George Serafeim & Ioanna Serafeim, 2013. "Does Mandatory IFRS Adoption Improve the Information Environment?," Contemporary Accounting Research, John Wiley & Sons, vol. 30(1), pages 388-423, March.
    21. Kim, Yongtae & Park, Myung Seok, 2009. "Market uncertainty and disclosure of internal control deficiencies under the Sarbanes-Oxley Act," Journal of Accounting and Public Policy, Elsevier, vol. 28(5), pages 419-445, September.
    22. Grosse-Rueschkamp, Benjamin & Steffen, Sascha & Streitz, Daniel, 2019. "A capital structure channel of monetary policy," Journal of Financial Economics, Elsevier, vol. 133(2), pages 357-378.
    23. Hau, Harald & Lai, Sandy, 2016. "Asset allocation and monetary policy: Evidence from the eurozone," Journal of Financial Economics, Elsevier, vol. 120(2), pages 309-329.
    24. Huy Nguyen Anh Pham & Vikash Ramiah & Imad Moosa, 2020. "The effects of environmental regulation on the stock market: the French experience," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3279-3304, December.
    25. Irma Malafronte & Maria Grazia Starita & John Pereira, 2018. "The effectiveness of risk disclosure practices in the European insurance industry," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 17(1), pages 130-147, February.
    26. Beng Wee Goh & Chee Yeow Lim & Gerald J. Lobo & Yen H. Tong, 2017. "Conditional Conservatism and Debt versus Equity Financing," Contemporary Accounting Research, John Wiley & Sons, vol. 34(1), pages 216-251, March.
    27. Richard Lambert & Christian Leuz & Robert E. Verrecchia, 2007. "Accounting Information, Disclosure, and the Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 385-420, May.
    28. Patelis, Alex D, 1997. "Stock Return Predictability and the Role of Monetary Policy," Journal of Finance, American Finance Association, vol. 52(5), pages 1951-1972, December.
    29. Kwangwuk Oh & Wooseok Choi & Seok Woo Jeong & Jinhan Pae, 2014. "The effect of different levels of internal control over financial reporting regulation on the quality of accounting information: evidence from Korea," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 21(4), pages 412-442, December.
    30. Atanasov, Vladimir & Black, Bernard & Ciccotello, Conrad & Gyoshev, Stanley, 2010. "How does law affect finance? An examination of equity tunneling in Bulgaria," Journal of Financial Economics, Elsevier, vol. 96(1), pages 155-173, April.
    31. Jochen Zimmermann & Stefan Veith & Johannes Schymczyk, 2015. "Measuring Risk Premiums Using Financial Reports and Actuarial Disclosures," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 40(2), pages 209-231, April.
    32. Natividad Blasco & Pilar Corredor & Sandra Ferreruela, 2012. "Market sentiment: a key factor of investors’ imitative behaviour," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 52(3), pages 663-689, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Maio, Paulo & Philip, Dennis, 2015. "Macro variables and the components of stock returns," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 287-308.
    2. Dimos Andronoudis & Diogenis Baboukardos & Fanis Tsoligkas, 2024. "How the information content of integrated reporting flows into the stock market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 1057-1078, January.
    3. Dimos Andronoudis & Diogenis Baboukardos & Fanis Tsoligkas, 2024. "How the information content of integrated reporting flows into the stock market," Post-Print hal-04389552, HAL.
    4. Jorgensen, Bjorn & Li, Jing & Sadka, Gil, 2012. "Earnings dispersion and aggregate stock returns," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 1-20.
    5. Jeffrey L. Callen, 2016. "Accounting Valuation and Cost of Equity Capital Dynamics," Abacus, Accounting Foundation, University of Sydney, vol. 52(1), pages 5-25, March.
    6. Anthony M. Diercks & William Waller, 2017. "Taxes and the Fed : Theory and Evidence from Equities," Finance and Economics Discussion Series 2017-104, Board of Governors of the Federal Reserve System (U.S.).
    7. Chiu, Junmao & Chung, Huimin, 2019. "Legal institutions and fragile financial markets," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 277-298.
    8. Kausar, Rabia & Qayyum, Abdul, 2018. "How Cash Flow News and Discount Rate News Impact the Unexpected Stock Returns of Energy Firms of Pakistan," MPRA Paper 91165, University Library of Munich, Germany.
    9. Jiang, Yuexiang & Fu, Tao & Long, Huaigang & Zaremba, Adam & Zhou, Wenyu, 2022. "Real estate climate index and aggregate stock returns: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    10. Maio, Paulo, 2016. "Cross-sectional return dispersion and the equity premium," Journal of Financial Markets, Elsevier, vol. 29(C), pages 87-109.
    11. De George, Emmanuel T. & Li, Xi & Shivakumar, Lakshmanan, 2016. "A review of the IFRS adoption literature," LSE Research Online Documents on Economics 67599, London School of Economics and Political Science, LSE Library.
    12. Sellin, Peter, 1998. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Working Paper Series 72, Sveriges Riksbank (Central Bank of Sweden).
    13. Chue, Timothy K. & Gul, Ferdinand A. & Mian, G. Mujtaba, 2019. "Aggregate investor sentiment and stock return synchronicity," Journal of Banking & Finance, Elsevier, vol. 108(C).
    14. Rutger-Jan Lange & Coen N. Teulings, 2021. "The option value of vacant land: Don't build when demand for housing is booming," Tinbergen Institute Discussion Papers 21-022/IV, Tinbergen Institute.
    15. Jeong‐Bon Kim & Leye Li & Louise Yi Lu & Yangxin Yu, 2021. "Financial statement comparability and managers’ use of corporate resources," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 1697-1742, April.
    16. Van Geyt, Debby & Van Cauwenberge, Philippe & Vander Bauwhede, Heidi, 2014. "Does high-quality corporate communication reduce insider trading profitability?," International Review of Law and Economics, Elsevier, vol. 37(C), pages 1-14.
    17. Chan, Joshua C.C. & Santi, Caterina, 2021. "Speculative bubbles in present-value models: A Bayesian Markov-switching state space approach," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
    18. Saiying Deng & Vincent J. Intintoli & Andrew Zhang, 2019. "CEO Turnover, Information Uncertainty, and Debt Contracting," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-54, June.
    19. Challe, Edouard & Giannitsarou, Chryssi, 2014. "Stock prices and monetary policy shocks: A general equilibrium approach," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 46-66.
    20. Yu-chin Chen & Kwok Ping Tsang, 2009. "A Macro-Finance Approach to Exchange Rate Determination," Working Papers UWEC-2009-24-R, University of Washington, Department of Economics, revised May 2010.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:acctfi:v:61:y:2021:i:4:p:5341-5376. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/aaanzea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.