The Information Asymmetry and Earnings Surprises: Evidence from the US Insurance Industry

37 Pages Posted: 3 Jun 2010 Last revised: 17 Jul 2012

See all articles by Carmen Cotei

Carmen Cotei

University of Hartford - Department of Economics, Finance & Insurance

Joseph B. Farhat

Central Connecticut State University - Department of Finance

Mercedes Miranda

Wayne State University

Date Written: June 1, 2010

Abstract

This paper examines the effects of competing measures of earnings surprises on the value of insurance firms for a sample of 105 Life-Health insurers and 109 Property-Casualty insurers during the 1998-2007 period. Using the surprise portfolio approach, we find that investors in insurance stocks react to "street earnings" rather than accounting earnings and there is a positive relation between the magnitude and direction of earnings surprises and cumulative abnormal returns. Our results support the differential information hypothesis in the context of insurance industry. The evidence shows that smaller size insurers, those with higher information asymmetry and those followed by fewer analysts convey more information to market participants, generating higher cumulative abnormal returns in response to earnings surprises.

Suggested Citation

Cotei, Carmen and Farhat, Joseph and Miranda, Mercedes, The Information Asymmetry and Earnings Surprises: Evidence from the US Insurance Industry (June 1, 2010). Midwest Finance Association 2012 Annual Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1618730 or http://dx.doi.org/10.2139/ssrn.1618730

Carmen Cotei

University of Hartford - Department of Economics, Finance & Insurance ( email )

United States

Joseph Farhat (Contact Author)

Central Connecticut State University - Department of Finance ( email )

1615 Stanley Street
New Britian, CT 06050
United States

Mercedes Miranda

Wayne State University ( email )

Detroit, MI 48202
United States

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