Is the One-Time Accounting Charge Really Trivial? Evidence from the Insurance Industry

Motivated by the increasing use of one-time charges in the US insurance industry, this paper examines the information content of explicit announcements of such charges in the US insurance industry over the period 1990 to 2001. We find that, as expected, market reaction tends to vary according to the nature of one-time charges. Specifically, we observe a positive market response to one-time charges due to business restructure and lawsuit settlement, but a negative reaction to charges arising from accounting policy change, increasing loss reserve, and acquisition of other firms. These results are largely consistent with evidence obtained from the general corporate sectors. Additional regression analysis confirms a significant correlation between the magnitude of abnormal returns and the (relative) amount of one-time charges. At a time when more companies are being charged for misleading financial statements, our results provide important insights to industry regulators, managers, and investors.