Do Analysts Account for Accruals? Evidence from the Insurance Industry*

Abstract

AbstractProperty‐casualty (PC) insurers are mandated by the Securities and Exchange Commission (SEC) to report managers’ revisions of loss reserve estimates (“development”) in 10‐K supplemental disclosures. Using manually collected PC insurers’ development, we examine whether analysts’ earnings forecasts incorporate information in development. We initially show that development has incremental power to predict insurers’ future profitability. Although analysts revise earnings forecasts in response to the updates on development in 10‐K filings, their forecast errors are positively related to development. We also find that analysts exhibit greater errors for firms that exert more discretion over development. Overall, our findings suggest that analysts do not fully incorporate the information in managers’ estimates.