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

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.