The Information and Wealth Effects of Earnings Surprises in the U.S. Insurance Industry

This study examines the role of information asymmetry on insurer price adjustments in response to earnings surprises and the effects of competing measures of earnings surprises on the value of insurers during 1998–2007. Using the surprise portfolio approach, we find that investors in insurance stocks react to “street earnings” rather than accounting earnings. Our results support the differential information hypothesis that smaller-size insurers, those with higher residuals in daily stock returns, and those followed by fewer analysts convey more information to market participants, generating higher cumulative abnormal returns in response to earnings surprises. In addition, we find that property-casualty insurers with lower asset transparency and life-health insurers with extensive use of reinsurance have more informative earnings announcements.