Insurance regulators substantially relaxed rules on deferred tax asset (DTA) inclusion in regulatory capital calculations during and following the financial crisis. We find evidence firms use additional discretion in regulation to increase the level of DTAs admitted into regulatory capital. As DTAs are less liquid relative to other assets, our study raises the concern that insurance firms may appear more financially stable than the reality of their underlying economic condition. Consistent with this concern, we find firms with relatively low levels of regulatory capital engage in greater risk-taking than their peers, potentially as a means of qualifying additional DTAs for inclusion in regulatory capital. Higher levels of DTAs are also associated with a higher likelihood of insolvency, and investors appear to recognize the increased risk associated with increased inclusion of DTAs in regulatory capital. Our study has important implications for regulators considering changes to capital standards for other financial institutions.

The health insurance industry has experienced substantial consolidation following the passage of the Affordable Care Act (ACA). This paper examines the valuation effects of mergers in the U.S. health insurance industry pre- and post-ACA. We use event studies and cross-sectional regression models for our abnormal return analyses of health insurers and substantiate our results through calculating potential sample selection bias and the impact threshold of confounding variables. Our analyses document positive target returns and non-negative bidder and combined returns, which provide support for the inefficient management hypothesis. Our cross-sectional regression results show that abnormal returns from merger announcements are lower for health bidders compared to health targets. We also find that health insurer bidders receive higher positive abnormal returns after the ACA enactment. Additionally, our results indicate mergers occur for synergistic reasons in the pre-ACA period; however, post-ACA mergers have collusive effects.

This paper investigates the relation between executive compensation, earnings management, and organizational form. We find that managers of publicly traded stock firms who receive a larger portion of their compensation in the form of incentive-based bonus payments are more likely to manipulate loss reserves, whereas managers of customer-owned (mutual) firms and privately held stock .firms are not. Specifically, we find that managers of publicly traded .firms tend to make earnings-increasing decisions as they receive a higher level of compensation in the form of a bonus, consistent with the theories proposed by Healy (1985). We find no evidence of a similar effect when analyzing managers of mutual firms or private stock firms, which is consistent with what agency theory predicts. Additionally, we find that specific decision makers (i.e., CEOs) show evidence of having made bonus-increasing earnings management decisions.

This study investigates asymmetric incentives in firms managing earnings in an attempt to achieve a target financial strength rating. We find empirical evidence that firms with an actual rating below their target rating use income-increasing earnings management. However, we find no evidence that firms above their target rating manage earnings. Our findings are robust to a variety of alternative definitions of target rating. Notably, we examine a subset of firms with an exogenously determined target rating and find consistent results. These findings indicate that firms have incentives to reach a target rating if they are rated below their target, but not above their target. 

The Financial Accounting Standard Board (FASB) recently issued Accounting Standards Update No. 2016-01 which requires firms to report unrealized gains and losses on available-for-sale (AFS) equity securities in net income, thus reducing firms’ ability to manage or smooth earnings. Previously, these gains and losses were recorded in other comprehensive income and were not recognized in net income until the investments were sold. This paper examines the capital market consequences associated with this reporting change. Using data from U.S. public insurers, we find a significant decrease in firms’ earnings response coefficient (ERC) after the application of this new standard, and that the mechanism explaining this reduction in ERC is a decrease in earnings persistence. This result suggests that, after the reporting change, earnings less fully reflect the information investors use when revising their beliefs about firm value around earnings announcements. However, our evidence also indicates no significant changes in investor assessment of overall firm risk following the reporting change. This result suggests that investors appear to understand that the reduction in earnings persistence is not reflective of a change in firm risk. Overall, our results suggest that the classification of unrealized gains/losses on AFS equity securities into net income reduces the persistence of earnings and reduces the extent to which earnings reflect the information investors use to revise their beliefs about firm value around earnings announcements, and that investors appear to recognize that these reductions in persistence are not a reflection of firm performance becoming more volatile.

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-01 which requires firms to report unrealized gains and losses on available-for-sale (AFS) equity securities in net income. Previously, these gains and losses were reported in other comprehensive income and were not recognized in net income until the investments were sold. The rule change begs the question of whether insurers increased their earnings management discretion (largely via loss reserves) to offset the reduced discretion in terms of recognizing investment income. We examine how earnings reclassification impacts firms' investment strategy and earnings management behavior around earnings reports. Using data from US insurers, we find that firms decrease their equity holdings while increasing holding periods on equity securities following the adoption of this new standard. These results suggest that ASU 2016-01 shifts firms' investment focus from short-term financial reporting to long-term investment income maximization goals. We also find evidence that this rule update changes firms' earnings management behavior in that the rule change removes firms' incentives to cherry-pick sales of equity. We document that public insurers are involved in less gain trading to avoid reporting losses following the rule adoption. Instead, we find evidence that public insurers are more likely to use discretion over reported loss reserves to manage reported earnings after the rule change.

Theory suggests that firms move through distinct lifecycle stages that are determined by internal and external factors. Empirical evidence indicates that firm behavior differs across these lifecycle stages. Using a cashflow-based proxy for lifecycle stages, we examine how demand for corporate risk management, measured by property-casualty insurer reinsurance use, varies across the corporate lifecycle. Our results suggest that demand for reinsurance varies across lifecycle stages, with firms using more reinsurance in the introduction, growth, shake-out, and decline stages. We also find evidence that there are observable differences in the relation between reinsurance use and lifecycle stages when considering external and internal reinsurance separately. Finally, when we jointly consider the impact of lifecycles and factors capturing the main theoretical motives for reinsurance use (i.e., capacity, catastrophic exposure, and earnings smoothing), we continue to observe differences in the relationship between lifecycles and the demand for internal and external reinsurance.

We examine gains trading behavior under a unique accounting rule in the U.S. life insurance industry. When a bond is sold, the proceeds must be amortized over its remaining maturity. This rule limits earnings management using realized capital gains and losses (RGL); overcoming this limitation requires managers to engage in extraordinary sales activity. Using quantile regressions, we find evidence that firms in the highest quartile of RGL realize gains to offset operating losses. Such behavior becomes more extreme in the highest quantiles of the RGL distribution. We find that this behavior is driven by private life insurers who report to stakeholders under statutory accounting principles, where this accounting rule applies. Our study contributes to the literature on earnings management among financial institutions, highlighting the nuances of gains trading when reporting rules dilute the effectiveness of such behaviors.

In this study, we examine the effect of a capital regulation reform on U.S. insurers’ pricing of homeowners insurance. The reform imposes greater regulatory capital costs for insurers exposed to catastrophe risks. We first document that the regulatory capital reform had a meaningful impact on insurers. Using a difference-in-differences design and homeowners insurance prices in the U.S., we find empirical evidence that the reform results in modest price increases per household. Our back-of-the-envelope calculation suggests the increase in insurance price is commensurate to 22-48% of the increase in regulatory capital costs due to catastrophes. We also find that the increase is driven by insurers with greater regulatory capital constraints. Overall, our study provides evidence that climate-related regulatory capital costs can be passed on to consumers at a modest level.

We use a novel dataset that contains private homeowners insurance market activities including average insurance prices, insurance cancellations, and cancellations attributable to hurricanes, at the insurer-county-quarter level in Florida. We merge the dataset with individual property-level transaction data in Florida. Using insurance supply-side factors as an instrument for insurance prices, we report that a 10% increase in average homeowners insurance prices leads to a decrease in housing prices of at least 1.2% to 2.1%, with pronounced effects on risky areas and in areas with a high prevalence of insurance policy cancellations due to hurricanes. Our results are robust to using both house price indices and individual housing transactions, to including comprehensive location-specific or property-specific fixed effects, and to including a rich set of time-varying locational and housing attributes. In addition, our results are not driven by disaster-related factors and are more pronounced in areas with a higher prevalence of mortgages and GSE loans. Our findings shed light on the critical role of homeowners insurance in the housing market and suggest that its availability and pricing stability are significant factors influencing property values. To our knowledge, this is the first study to explore the effects of private homeowner insurance on house prices.

Financial statement users struggle to understand complex estimates. We examine whether increased disclosure around complex estimates aids financial statement users’ understanding of the underlying estimate. We use the adoption of ASU 2015-09, which required increased disclosure surrounding a material complex estimate for insurance companies, the loss reserve, to test our research question. We find that while firms' loss reserve disclosures became more comparable after ASU 2015-09, they also became more complex. The net effect of these disclosure changes negatively influences investors' ability to properly price insurers' loss reserves, indicating that the disclosures increased investor uncertainty surrounding this complex estimate. Our findings contribute to the disclosure and complex estimates literature and should be of interest to the FASB and SEC as they consider requiring increased disclosure in other complex areas of financial reporting.

This study examines the impact of enterprise risk management (ERM) on corporate financial misconduct. ERM represents a structured, holistic approach to managing the entire portfolio of risks faced by an enterprise. We expect that ERM curtails financial misconduct because ERM reduces managerial incentives for misconduct through decreasing external financing pressure and alleviating managerial short-termism. Using hand-collected data on ERM adoptions among S&P 500 firms, we find that firms with an ERM program experience less financial misconduct as measured by Accounting and Auditing Enforcement Releases (AAERs) and class-action lawsuits than firms without an ERM program. The curtailing effect of ERM on financial misconduct is more pronounced when managerial incentives for misconduct are stronger (i.e., among firms subject to financial constraints or with greater managerial short-termism), as well as when an ERM program becomes more mature. We also instrument for firms’ ERM adoption with an exogenous event—exposure to natural catastrophes and our results hold.

This paper provides the first comprehensive analysis of trends and drivers of commercial property insurance costs in the United States. Drawing on a novel panel dataset of over 137,000 commercial properties from 2010 to 2023, we document a sharp and sustained rise in insurance prices, particularly since 2018. These increases are most pronounced in climate-exposed areas and for property types such as multifamily and lodging. Using detailed property-level operating statements and data on insurer financials, disaster histories, and climate risk measures, we find that property-level insurance costs are significantly associated with building characteristics and local insurance market conditions. Importantly, properties located in high climate-risk areas pay substantially higher premiums. Using a stacked difference-in-differences design, we further find that insurance costs rise by approximately 3% following a major climate event. These results highlight how insurers price both anticipated and realized climate risk, with implications for valuation, lending, and policy in an increasingly uncertain risk environment.

In this study, we develop and validate a text-based measure of corporate risk management. Despite the growing importance of risk management over time, academic studies typically focus on one aspect of a firm's risk management program, such as hedging or insurance purchases. Using text from analyst reports, we apply machine learning techniques to develop a firm-specific, time-varying measure of corporate risk management. In addition to statistical validation, we find that our measure is correlated with key firm characteristics, including size and leverage, and is associated with reduced future accounting-and market-based risk as well as enhanced firm value. Importantly, by comparing our measure to Chief Risk Officer (CRO) appointments and decomposing their informational overlap, we find that the unique information captured by our text-based measure, unlike that tied to CRO appointments, is significantly related to risk reduction and value enhancement. These results highlight the importance of a deeply embedded risk management culture, suggesting that the full benefits of effective risk management practices are best understood when considering both organizational structures and the underlying cultural drivers communicated to external stakeholders. 

We examine costs and benefits associated with accounting standards that allow property-casualty insurers to discount their loss reserves. While discounting reserves presents a more complete assessment of a firm’s economic condition, it may also be used to manage earnings. Using a sample of Canadian insurers from 2011 to 2019, we find empirical evidence that firms manage discount rates in response to financial weakness, rate regulation, and potential merger activity, suggesting that firms use discretion over discount rates to meet reporting objectives. However, we find no evidence of substitution between earnings management tools. We also find evidence that discount rates convey useful information to external parties—they are relevant predictors of future investment returns and are incorporated into analyst ratings. Finally, we document real effects of requiring firms to report discount rates. Firms reporting higher rates allocate more of their investment portfolio to equities to justify the higher rates.

Enterprise Risk Management (ERM) is a holistic approach to identifying, assessing, and managing risks across a company. This study examines the impact of firms’ ERM programs on employee safety using establishment-level data from the U.S. Department of Labor’s Occupational Safety and Health Administration (OSHA). Employing a difference-in-differences (DiD) model on a propensity-score-matched (PSM) sample, we find that firms with ERM programs experience a significant reduction in employee injuries and illnesses, resulting in an average decline of approximately 31%. Additionally, our stacked DiD analysis confirms the robustness of these findings. We provide evidence that ERM’s effects on improving employee safety are concentrated among firms with high financial constraints, weak monitoring and coordination structures, and in more competitive industries. This study bridges the gap in the literature on the operational benefits of ERM, highlighting its broader implications for protecting human capital and promoting societal well-being.

This paper investigates how insurer financial strength ratings impact capital structure. Specifically, we examine how firms alter their capital structure following a rating downgrade. Consistent with prior literature, we find that insurers decrease leverage following a downgrade. We next examine various ways in which firms achieve this adjustment. We find empirical evidence that insurers raise external capital, receive internal capital markets transactions, and understate estimated losses following a rating downgrade. This paper contributes to the literature examining insurer capital structure, as well as the literature examining the impact of financial strength ratings on insurer outcomes. This study also contributes to the literature examining internal capital markets and accounting discretion, by documenting that both are impacted by ratings considerations. 

In this proposal, we discuss how we intend to extend previous research on the incidence and effects of regulatory interventions with troubled or insolvent property-casualty insurance companies. This research has focused solely on formal, public regulatory interventions (FPRIs). Generally, prior studies have found that greater regulatory forbearance (i.e., more time between the first intervention and the liquidation of a company) tends to increase the cost of insurance insolvencies as measured by guaranty association (GA) assessments. What has not been examined is the incidence and effects of informal, nonpublic regulatory interventions (INPRIs). Our initial analysis suggests that such interventions are common; in some cases, they precede formal actions and in other cases no formal action occurs. Among the questions we wish to explore is whether INPRI is more often associated with better outcomes (e.g., companies not being liquidated, lower GA costs) than worse outcomes. In other words, does such intervention mean that regulators are acting more proactively, or does it mean that they are either putting off the inevitable or letting companies dig themselves deeper into a whole. The answers to these questions may be that "it depends" on the specific circumstances of a given company as well as the nature of the INPRIs. Regardless, we contend that the measurement of regulatory forbearance ideally should consider both categories of interventions as well as their timing. We develop a measure of INPRIs based on insurer financial statements. Using this measure, we find evidence that INPRIs are associated with a higher probability of eventual FPRI. However, we also find preliminary evidence that when a firm’s RBC ratio is not below its Company Action Level (CAL) risk-based capital (RBC) requirement, INPRIs can reduce the probability of entering FPRI. Our initial results suggest that U.S. insurance regulators exercise broader authority and discretion with respect to troubled insurers than what has been recognized in the extant academic literature.

We examine whether the personal background of decision-makers affects accounting estimates. Testing for the effect of cultural values and gender of actuaries and CEOs on reported loss reserve, we find that the cultural values of actuaries affect the accuracy of loss reserve estimates. These results are robust to using year fixed effects, change of family name, and cultural origin. The CEO’s cultural background did not impact loss reserve estimates, but female CEOs were associated with larger reserving errors. We also use the financial crisis as a quasi-experimental shock to test for the presence of selection bias. Overall, we show that the actuary’s cultural background, but not gender affects the accuracy of loss reserve estimates. Specifically, the accuracy of loss reserve is significantly less when an actuary’s background is rooted to a culture with low uncertainty avoiding values and greater when the actuary’s background is rooted to a culture with high uncertainty avoiding values.

In this study we examine insurers’ claim-level loss reserving for medical malpractice claims. Using detailed information on claims filed with insurers in Texas from 1988 to 2015, we evaluate claim and procedural characteristics that are associated with insurers’ reserving errors. We compare the amounts initially reserved by the insurer with the final reserve – typically the final award amount – and find that the type of injury is significantly related to the accuracy of initial reserve when compared to the final reserve amount (i.e., the final award). Procedural characteristics – e.g., whether a lawsuit is filed – are also significant determinants of accurate reserves. Overall, these findings provide a better understanding of the sources of uncertainty affecting insurer reserving behavior, which is usually evaluated at the aggregate, line-of-business, level.

This study investigates the role managerial style plays in establishing insurer loss reserves. While the majority of prior studies have examined firm-level incentives for management of the insurer loss reserve, relatively  fewer studies have examined the role played by managers. By tracking chief executive officers (CEOs) across firms over time, I can examine the role CEOs have in determining loss reserve error magnitude and accuracy for different firms. I find evidence that CEO fixed effects have significant explanatory power when estimating the determinants of loss reserve errors. This suggests that individual managers play a significant role in establishing loss reserves. This study contributes to the literature examining the impact of individual managers on firm accounting policies, as well as the literature examining the determinants of insurer loss reserve errors. 

We examine the effect of government regulation on a firm’s cost of capital and the spillover effects on innovation.  We use the health insurance industry as our setting as regulators passed the Affordable Care Act (ACA) in 2010, providing an exogenous shock to the industry. We find evidence consistent with firms in the healthcare industry experiencing an increase in the equity cost of capital following the passage of ACA.  We also find a decrease in future patent applications, suggesting a decrease in innovation for these firms following the passage of ACA.  Finally, we find that firms with greater cost of capital increases following the passage of ACA engage in incrementally less innovation, suggesting that at least part of the decrease in innovation relates to the premium demanded by investors following government intervention.