Incentives for Managing Accounting Information: Property- Liability Insurer Stock-Charter Conversions

Abstract

We examine incentives to manage accounting information within 63 property-liability insurance company conversions from mutual ownership to common stock charter. In the process of conversion, policyholders' embedded equity claims must be valued. Since mutuals have no separately traded equity, accounting numbers are an important input in this valuation. Our evidence suggests that converting firms manage accounting information to reduce surplus primarily by adjusting liabilities and realizing investment returns, not by changing underwriting activities. Within our sample, we find the strongest evidence of surplus management among firms where the mutual's executives become the firm's principal stockholders after conversion.

JEL Classification: G22, N41, M41