Health-Insurer Bargaining Power and Firms' Incentives to Manage Earnings: Evidence from an Economic Shock

43 Pages Posted: 21 May 2014 Last revised: 14 Jul 2017

See all articles by Francesco Bova

Francesco Bova

University of Toronto - Rotman School of Management

Yiwei Dou

New York University (NYU) - Department of Accounting

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Date Written: July 10, 2017

Abstract

Health-insurance premiums account for a significant portion of the cost base of U.S. corporations. A recent study finds that health-insurance premiums increase for firms that experience positive profit shocks (Dafny 2010), suggesting that the U.S. health-insurance market is not perfectly competitive. Motivated by this finding and the economic importance of health-insurance premiums, this is the first study to examine firms’ earnings-management incentives in the face of insurance carriers with strong bargaining power. We use an innovative dataset for a large sample of U.S. firms with detailed information on insurance premiums and insurance-plan characteristics. Employing an economic shock to insurance firms’ bargaining power and difference-in-differences tests, we find that firms manage their reported earnings downward when insurance providers have strong bargaining power. We further show that this effect is more pronounced in settings in which there are ex-ante reasons to expect stronger incentives to manage earnings downward. We also provide preliminary evidence suggesting that downward earnings management has the intended effect of mitigating future increases in health-insurance premiums. Our analyses highlight an inefficient health-insurance market as an important determinant of firms’ financial reporting choices

Keywords: Health-insurance premiums, bargaining power, downward earnings management, non-investor stakeholders

JEL Classification: H51, I10, I11, M1, M41, E62, G30, G31, G34

Suggested Citation

Bova, Francesco and Dou, Yiwei and Hope, Ole-Kristian, Health-Insurer Bargaining Power and Firms' Incentives to Manage Earnings: Evidence from an Economic Shock (July 10, 2017). 2015 Canadian Academic Accounting Association (CAAA) Annual Conference; Rotman School of Management Working Paper No. 2438716; Forthcoming, Journal of Accounting, Auditing, and Finance. Available at SSRN: https://ssrn.com/abstract=2438716 or http://dx.doi.org/10.2139/ssrn.2438716

Francesco Bova

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3985 (Phone)

Yiwei Dou

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

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