Earnings Persistence and Market Reaction to Earnings in the International Insurance Industry

Abstract

Objective: this paper analyses the earnings persistence and market reaction to earnings in the international insurance industry. Methods: the analysis considers a sample of 307 listed international insurance companies from 2004 to 2019 and assesses several quantitative empirical models and estimations, including panel fixed effects and pooled OLS. Results: results indicate that operating cash flows are highly and strongly persistent when compared to the accruals component of earnings and that reported earnings are informative about companies’ performance. However, these findings vary significantly across insurance sub-segments. Additionally, the association between earnings and returns is significantly affected by specific companies’ performances in the sense that market agents review their expectation in a higher level when a reduction in earnings (bad news) is reported. Results also show that market risk patterns are positively associated with earnings response coefficient, suggesting a numerator effect of risk. Conclusions: overall, this paper provides evidence that economic analysis and scrutiny of earnings persistence and the market reaction to earnings announcements in insurance industry, and its insurance sub-segments, can provide superior assessment of future outcomes by investors, regulators, and academics.

Keywords

• insurance industry
• earnings persistence
• earnings response coefficient
• accounting
• market-based accounting