The Effects of Uncertainty on the Informativeness of Earnings: Evidence from the Insurance Industry in the Wake of Catastrophic Events
34 Pages Posted: 2 Feb 1999
Date Written: January 2001
This study examines the effects of uncertainty caused by large-scale catastrophes on the informativeness of earnings announcements by property and casualty insurers. It contributes to the literature on the effects of uncertainty on the informativeness of earnings announcements by distinguishing between: (1) uncertainty due to exogenous events that obscure the firm's future prospects, and (2) uncertainty due to noise in earnings. Results suggest that heightened uncertainty associated with exposure to catastrophe losses is significantly positively associated with the market's response to earnings reports, even after controlling for uncertainty due to noise in earnings. This implies that during periods of high uncertainty, investors find earnings information more useful in assessing the future prospects of the firm. Furthermore, evidence of higher earnings response coefficients in periods with larger earnings surprises suggests that the economic effects of catastrophe-induced uncertainty dominate the nonlinear relation between the magnitude of unexpected earnings and abnormal returns documented by Freeman and Tse (1992).
JEL Classification: D80, G22, M41, G12
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