Accounting Estimation Disclosures and Firm Valuation in the Property-Casualty Insurance Industry
- 22 July 1997
- journal article
- Published by SAGE Publications in Journal of Accounting, Auditing & Finance
- Vol. 12 (3), 257-281
- https://doi.org/10.1177/0148558x9701200305
Abstract
Accounting earnings are subject to estimation error. Under GAAP, corrections to estimates are included in current and future earnings, but characteristics of previous errors are not disclosed. An exception exists for property-casualty insurers. SEC mandated disclosures reveal errors in previous claim expense estimates as well as the correction for those errors in current earnings. An important issue is whether these detailed disclosures are value-relevant. We examine the information content of the SEC disclosures by testing their valuation implications. We investigate whether estimation errors in previous earnings influence the reflection of current earnings in price. Results suggest that investors use these disclosures in valuation decisions. Insurers with more variable estimation errors have smaller earnings response coefficients. Apparently investors assume that the precision of previous earnings is indicative of the precision in current earnings. We also find that stock returns are associated with revisions of previous estimations included in current earnings. Our research has implications for regulation, suggesting that similar disclosures should be considered for other estimates.Keywords
This publication has 18 references indexed in Scilit:
- Fair value disclosures by bank holding companiesJournal of Accounting and Economics, 1996
- Extensions and violations of the statutory SEC form 10-K filing requirementsJournal of Accounting and Economics, 1994
- A Nonlinear Model of Security Price Responses to Unexpected EarningsJournal of Accounting Research, 1992
- The Role of Earnings Levels in Annual Earnings-Returns StudiesJournal of Accounting Research, 1992
- The Estimation and Determinants of Associations between Returns and Earnings: Evidence from Cross-Industry ComparisonsJournal of Accounting, Auditing & Finance, 1991
- An analysis of intertemporal and cross-sectional determinants of earnings response coefficientsJournal of Accounting and Economics, 1989
- Financial Reporting, Supplemental Disclosures, and Bank Share PricesJournal of Accounting Research, 1989
- On cross-sectional analysis in accounting researchJournal of Accounting and Economics, 1987
- Market Implications of Predisclosure Information: Size and Exchange EffectsJournal of Accounting Research, 1987
- Regression DiagnosticsWiley Series in Probability and Statistics, 1980