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

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  • William H. Beaver

    (Stanford University)

  • Maureen F. McNichols

    (Stanford University)

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.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:reaccs:v:6:y:2001:i:2:d:10.1023_a:1011662825164
    DOI: 10.1023/A:1011662825164
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    References listed on IDEAS

    as
    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. Bernard, Victor L. & Thomas, Jacob K., 1990. "Evidence that stock prices do not fully reflect the implications of current earnings for future earnings," Journal of Accounting and Economics, Elsevier, vol. 13(4), pages 305-340, December.
    3. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
    4. 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.
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    Cited by:

    1. Shivaram Rajgopal & Terry Shevlin & Mohan Venkatachalam, 2003. "Does the Stock Market Fully Appreciate the Implications of Leading Indicators for Future Earnings? Evidence from Order Backlog," Review of Accounting Studies, Springer, vol. 8(4), pages 461-492, December.
    2. Baruch Lev & Stephen G. Ryan & Min Wu, 2008. "Rewriting earnings history," Review of Accounting Studies, Springer, vol. 13(4), pages 419-451, December.
    3. Chih-Ying Chen, 2010. "Do analysts and investors fully understand the persistence of the items excluded from Street earnings?," Review of Accounting Studies, Springer, vol. 15(1), pages 32-69, March.

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