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Discretionary and Non-Discretionary Revisions of Loss Reserves by Property-Casualty Insurers: Differential Implications for Future Profitability, Risk and Market Value

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  • Kathy R. Petroni

    (Michigan State University)

  • Stephen G. Ryan

    (New York University)

  • James M. Wahlen

    (Indiana University)

Abstract

We develop and estimate a PC-industry specific model in which proxies for both discretion and non-discretion are used to partition loss reserve revisions into discretionary and non-discretionary components. The use of such proxies enables us to test directional hypotheses about the relations between the revision components and future profitability, risk and market value. We predict and find that discretionary revisions are negatively associated with future profitability, positively associated with firm risk, and negatively associated with market-to-book ratios. We predict and find that non-discretionary revisions are positively associated with future profitability and risk but are not associated with market-to-book ratios.

Suggested Citation

  • Kathy R. Petroni & Stephen G. Ryan & James M. 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, Springer, vol. 5(2), pages 95-125, June.
    • Handle: RePEc:spr:reaccs:v:5:y:2000:i:2:d:10.1023_a:1009617023027
    DOI: 10.1023/A:1009617023027
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    References listed on IDEAS

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    1. Petroni, Kathy Ruby, 1992. "Optimistic reporting in the property- casualty insurance industry," Journal of Accounting and Economics, Elsevier, vol. 15(4), pages 485-508, December.
    2. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 29(2), pages 193-228.
    3. Raymond D. Hill, 1979. "Profit Regulation in Property-Liability Insurance," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 172-191, Spring.
    4. Subramanyam, K. R., 1996. "The pricing of discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 249-281, October.
    5. Guay, WR & Kothari, SP & Watts, RL, 1996. "A market-based evaluation of discretionary accrual models," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 34, pages 83-105.
    6. William H. Beaver & Maureen F. McNichols, 1998. "The Characteristics and Valuation of Loss Reserves of Property Casualty Insurers," Review of Accounting Studies, Springer, vol. 3(1), pages 73-95, March.
    7. Guay, W. & Kothari, S.P. & Watts, R.L., 1996. "A Market-Based Evaluation of Discretionary-Accrual Models," Papers 96-01, Rochester, Business - Financial Research and Policy Studies.
    8. Beaver, W & Eger, C & Ryan, S & Wolfson, M, 1989. "Financial-Reporting, Supplemental Disclosures, And Bank Share Prices," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 27(2), pages 157-178.
    9. Beaver, William H. & Engel, Ellen E., 1996. "Discretionary behavior with respect to allowances for loan losses and the behavior of security prices," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 177-206, October.
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    Cited by:

    1. William H. Beaver & Maureen F. McNichols, 2001. "Do Stock Prices of Property Casualty Insurers Fully Reflect Information about Earnings, Accruals, Cash Flows, and Development?," Review of Accounting Studies, Springer, vol. 6(2), pages 197-220, June.
    2. Baruch Lev & Stephen G. Ryan & Min Wu, 2008. "Rewriting earnings history," Review of Accounting Studies, Springer, vol. 13(4), pages 419-451, December.

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