Discretionary and Non-Discretionary Revisions of Loss Reserves by Property-Casualty Insurers: Differential Implications for Future Profitability, Risk and Market Value

Kathy R. Petroni, Stephen G. Ryan and James M. Wahlen
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Kathy R. Petroni: Michigan State University
Stephen G. Ryan: New York University
James M. Wahlen: Indiana University

Review of Accounting Studies, 2000, vol. 5, issue 2, No 1, 95-125

Abstract: Abstract We develop and estimate a PC-industry specific model in which proxies for both discretion and non-discretion are used to partition loss reserve revisions into discretionary and non-discretionary components. The use of such proxies enables us to test directional hypotheses about the relations between the revision components and future profitability, risk and market value. We predict and find that discretionary revisions are negatively associated with future profitability, positively associated with firm risk, and negatively associated with market-to-book ratios. We predict and find that non-discretionary revisions are positively associated with future profitability and risk but are not associated with market-to-book ratios.

Keywords: Specific Model; Firm Risk; Future Profitability; Directional Hypothesis; Loss Reserve (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1023/A:1009617023027

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