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Information Risk and the Cost of Capital

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  • David L. Eckles
  • Martin Halek
  • Rongrong Zhang

Abstract

type="main" xml:lang="en"> This article applies a unique accruals measure to empirically test whether accruals quality affects the cost of capital for property–liability insurers. We utilize insurer loss reserve errors to accurately measure the quality of accruals. This measure, as well as conventional accruals measures, is used to investigate the extent to which accruals quality is priced into both debt and equity capital. We find that accruals quality is priced into debt capital; however, we find virtually no evidence that accruals quality is priced into equity capital. Our results should be of particular interest to insurers as it affects pricing ability. Specifically, insurers who provide primary debtholders (i.e., policyholders) less information risk are able to command higher prices. Furthermore, our results suggest that insurance is not a diversifiable asset.

Suggested Citation

  • David L. Eckles & Martin Halek & Rongrong Zhang, 2014. "Information Risk and the Cost of Capital," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(4), pages 861-882, December.
    • Handle: RePEc:bla:jrinsu:v:81:y:2014:i:4:p:861-882
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    Cited by:

    1. Chia‐Chun Chiang & Hugh Hoikwang Kim & Greg Niehaus, 2022. "Opaque liabilities, learning, and the cost of equity capital for insurers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(4), pages 1031-1076, December.
    2. Han, Sangyong & Lai, Gene C. & Ho, Chia-Ling, 2018. "Corporate transparency and reserve management: Evidence from US property-liability insurance companies," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 379-392.

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