Multimarket Competition and Earnings Quality: Evidence from the Insurance Industry

Wenyi Cai, Yijia Lin, Biyu Wu and Jifeng Yu

North American Actuarial Journal, 2025, vol. 29, issue 3, 686-712

Abstract: This study examines the impact of firm-specific competition on earnings quality, focusing on a large sample of property-casualty insurers in the United States. Our findings support the hypothesis based on multimarket competition theory, revealing an inverted U-shaped relationship between multimarket contact (MMC)—the degree of market overlap between firms—and earnings quality. Initially, as MMC increases, insurers report higher quality loss reserves. However, beyond a certain point, further increases in MMC lead to a decline in loss reserve quality. These findings suggest that while heightened multimarket competition enhances earnings quality, excessive MMC results in mutual forbearance, which deteriorates earnings quality. Quantile regression analyses indicate that this inverted U-shaped relationship is more pronounced among insurers with lower earnings quality. Additionally, our results are robust across various earnings quality measures, instrumental variable analyses, and subsample analyses. Overall, we provide initial evidence that MMC significantly influences financial reporting quality.

Date: 2025
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DOI: 10.1080/10920277.2025.2488470

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