Publications

This study examines the impact of enterprise risk management (ERM) programs on corporate tax planning. ERM is a holistic approach to managing an enterprise’s entire portfolio of risks (COSO 2004, 2017). We hand-collect data on ERM adoption for a sample of S&P 500 firms from 1993 to 2016. We empirically document that firms with ERM programs have lower cash effective tax rates (ETRs) than firms without ERM. Additionally, we find that the relation between ERM and tax avoidance is stronger among firms with more business segments. Finally, our results suggest ERM adoption offsets increases in opacity and tax uncertainty typically associated with tax avoidance strategies. Overall, we provide evidence that ERM allows firms to exploit tax avoidance opportunities through enhanced coordination and communication. 

In this study we examine how the passage of the Affordable Care Act (ACA) impacts health insurer capital structure and financing decisions. Economic theory suggests that a firm’s capital structure depends on the institutional environment, including the regulatory environment. Using a panel of firm-level data on health insurers from 2004 to 2016, we first test whether insurer capital structure changed following the ACA. We then test whether specific provisions of the ACA influenced capital issuance. We find that the ratio of health insurer liabilities to capital significantly increased following the ACA. Furthermore, we observe that capital issuance determinants differ following the ACA and that this difference is influenced by medical loss ratio requirements, Medicaid expansion, and exchange participation. Our study contributes to the capital structure literature, as well as the literature examining the impacts of the ACA. Our study also has important implications for evaluating financial stability in the health insurance sector.

Internal capital markets enable conglomerates to allocate capital to segments throughout the enterprise. Prior literature provides evidence that internal capital markets efficiently allocate capital based predominantly on group member prior performance, consistent with the “winner picking” hypothesis. However, existing research has not examined the critical question of how these “winners” perform subsequent to receiving internal capital—that is, do winners keep winning? We extend the literature by providing empirical evidence on whether or not internal capital markets are ex post efficient. We find, in contrast to mean reversion, that winners continue their relatively high performance. Our study contributes to the literature examining the efficiency of internal capital markets and the conglomerate discount, as well as the literature specifically examining capital allocation in financial firms.

Managed care provides health insurers a unique opportunity for discretion over certain aspects of financial reporting. Specifically, managed care mechanisms provide health insurers with a stronger ability to engage in loss control relative to other types of insurers. To test how health insurers exploit their ability to manage losses, we examine whether insures with more opportunities to manage care have significantly better underwriting performance in the fourth quarter relative to other health insurers. Using quarterly statutory filings from 2003-2016, we find evidence that a health insurer’s share of business in HMOs (relative to PPOs) is significantly and negatively related to their reported fourth quarter loss ratios. Additionally, while we find that fourth quarter loss ratios are higher for all health insurers following the implementation of the Patient Protection and Affordable Care Act (ACA), the ACA did not appear to influence health insurers with more ability to manage their fourth quarter results.  

Prior literature on ERM’s value implications focuses on cost-benefit analyses of implementing an ERM program. We take a novel approach by examining the implementation dynamics and study whether the timing of firms’ adoption affects ERM’s value implication. We find that firms experienced positive (negative) abnormal returns when adopting ERM following (prior to) 2005 when Standard & Poor’s (S&P) issued their ERM-related rating criteria. We also find evidence that ERM firms experienced positive abnormal market reactions to this rating criteria change by S&P but find no evidence for the following change by A.M. Best. Additionally, our study documents that the market rewarded ERM adopters and penalized non-adopters after November 2011 on key dates leading to the passage of the Own Risk Solvency Assessment (ORSA) Act when there was less uncertainty regarding ultimate passage of the Act. Overall, our results imply that the capital market’s view on ERM is shaped by rating agency and regulatory changes. Our findings are also consistent with the view that investors gain a greater understanding of ERM over time. 

The Patient Protection and Affordable Care Act (ACA) requires that insurers spend a minimum amount of their premium revenue on policyholder benefits.  The Act specifies enforcement via a combination of insurer self-reporting, government examinations, and payment of policyholder rebates in cases where insurers fail to meet the required spending amount.  We find that insurers’ reported estimates are consistently overstated in situations where more accurate estimates would have triggered rebate payments; publicly-traded insurers (particularly those exhibiting poor financial reporting quality) exhibit the strongest evidence of strategic over-estimating.  In aggregate, we estimate that approximately 14 percent of insurers engage in strategic overestimates, and that insurer overestimates resulted in hundreds of millions of dollars in underpaid policyholder rebates.  Our study illustrates how a combination of regulatory design choices and lax oversight can weaken the effectiveness of accounting-based regulation and have substantial economic consequences.

This study examines how tort reform affects uncertainty in insurance markets by testing whether noneconomic damage caps influence reserving volatility for medical malpractice insurers. Using a panel of insurers from 1986 to 2009, we estimate the determinants of loss reserve error volatility and focus on how this volatility is influenced by the percent of premiums an insurer writes that are subject to noneconomic damage caps. We find empirical evidence that tort reform reduces reserve volatility over the subsequent three- and five-year periods, consistent with tort reform improving insurers’ loss forecasting ability. Our findings address outcomes of tort reform that are prominent concerns of legislators, regulators, and policyholders. This article contributes both to the literature examining the insurance market effects of tort reform as well as the literature examining loss reserving practices.

There is a rich body of academic research into the question of earnings management via manipulation of loss reserve estimates in the property-casualty insurance industry. This study analyzes the variability of reserve estimates at different development horizons using individual company accident year reserve data to determine whether the predominant practice of relying on 5 years of development is appropriate. We examine two common measures of reserve estimation error, the loss reserve adjustment and the loss reserve development, and compare and contrast the two approaches. After examining reserve development patterns for each of the major lines of business reported in Schedule P, we conclude that the appropriate development horizon to accurately establish ultimate liability is longer than the current maximum reported horizon of ten years found in Schedule P for most lines of business. Although longer-term development horizons are necessary to establish insurers' ultimate liability, relatively short-term development horizons may be appropriate when attempting to identify deliberate manipulations or to assess solvency risk, where the short-term variations are the primary object of interest. Ultimately, this paper investigates the degree to which methodology originally developed for estimating loss reserve errors is appropriate today, in particular, relative to current data availability. 

This study investigates the relation between managerial overconfidence and loss-reserving practices in the U.S. property-liability insurance industry. We find robust evidence that CEO overconfidence is significantly associated with relatively low loss reserves, resulting in relatively high reported earnings. This finding is consistent with the theoretical predication that overconfident managers overestimate the returns on their investment projects and underestimate losses. Our result contributes to the literature linking CEOs’ personality traits and firms’ accounting policy as well as to the literature on insurer loss-reserving practices.

Loss reserves are a discretionary tool for managing insurer earnings, with more accurate and/or less volatile reserve errors resulting in higher accruals quality. We investigate whether accruals quality is related to financial strength ratings. Specifically, we use insurer loss reserve errors as a measure of the quality of accruals and examine whether overall accruals quality, as well as a decomposition into innate and discretionary accruals quality, is related to insurer financial strength ratings. We find that firms with lower-quality (noisier) accruals receive lower financial strength ratings from A.M. Best. This result holds for both innate and discretionary accruals. Overall, we provide the first evidence that the quality of accounting information is a significant factor in ratings of insurance firms.