Dividend Signaling by Insurance Companies and Price Regulation: A Reexamination

I reexamine Akhigbe, Borde, and Madura’s (1993) study of dividend signaling by insurers and provide an alternative interpretation from a price-regulation perspective. Using a more appropriate data classification system, I partition 161 insurance companies into three categories: life, property-liability, and multi-line. All three types of insurers experience significant abnormal returns during the dividend increase events. The property-liability insurers’ returns are less volatile during the event window period. This implies that investors of property-liability insurers are more confident in the content of dividend signals, perhaps because the price regulators bear part of investors’ monitoring costs. On the other hand, limited information due to price regulation urges investors of property-liability insurers to respond faster than do investors of life insurers. A cross-sectional analysis suggests that property-liability insurers experience large stock price response to dividend signaling. Since price regulation limits information regarding insurers’ performance conveyed through insurance premiums, dividend increases potentially convey more asymmetric information in property-liability insurers.