Information Risk and the Cost of Capital

Journal of Risk and Insurance, 2013, DOI: 10.1111/j.1539-6975.2013.01526.x

Posted: 15 Aug 2013

See all articles by David L. Eckles

David L. Eckles

Independent

Martin Halek

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Rongrong Zhang

Georgia Southern University

Date Written: March 14, 2013

Abstract

This article applies a unique accruals measure to empirically test whether accruals quality affects the cost of capital for property-liability insurers. We utilize insurer loss reserve errors to accurately measure the quality of accruals. This measure, as well as conventional accruals measures, is used to investigate the extent to which accruals quality is priced into both debt and equity capital. We find that accruals quality is priced into debt capital; however, we find virtually no evidence that accruals quality is priced into equity capital. Our results should be of particular interest to insurers as it affects pricing ability. Specifically, insurers who provide primary debtholders (i.e., policyholders) less information risk are able to command higher prices. Furthermore, our results suggest that insurance is not a diversifiable asset.

Keywords: Reserve Error, Earnings Management, Insurer

JEL Classification: G30, G22

Suggested Citation

Eckles, David L. and Halek, Martin and Zhang, Rongrong, Information Risk and the Cost of Capital (March 14, 2013). Journal of Risk and Insurance, 2013, DOI: 10.1111/j.1539-6975.2013.01526.x, Available at SSRN: https://ssrn.com/abstract=2233713

Martin Halek

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States

Rongrong Zhang

Georgia Southern University ( email )

statesboro, GA 30460
United States

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