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

See all articles by Theodore E. Christensen

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting; University of Georgia

Multiple version iconThere are 2 versions of this paper

Date Written: January 2001

Abstract

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

Suggested Citation

Christensen, Theodore E., The Effects of Uncertainty on the Informativeness of Earnings: Evidence from the Insurance Industry in the Wake of Catastrophic Events (January 2001). Available at SSRN: https://ssrn.com/abstract=146234 or http://dx.doi.org/10.2139/ssrn.146234

Theodore E. Christensen (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

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