Capital Market Risk Implications of Governance and Disclosure for the Insurance Industry: The Case of Sarbanes-Oxley

We analyze the changes in capital market risk measures following the passage of the Sarbanes-Oxley (SOX) Act of 2002 for publicly-traded insurers. The most substantive impact occurs for life insurers, who experience significant increases in all risk measures, although we also document significant increases in market risk for non­ life insurers. We find that insurers with relatively weak disclosure and governance in the pre-SOX period experience the greatest increases in risk, consistent with the expectation that (1) less credible insurers will divulge new information that is worrisome, and (2) weakly governed insurers will increase investor protection, leading to less conservative investment strategies. We also find that changes in governance that occur following the passage of SOX are positively and significantly related to changes in risk, further supporting the notion that improved investor protection is associated with increased managerial risk taking.