Consequences and Institutional Determinants of Unregulated Corporate Financial Statements: Evidence from Embedded Value Reporting


  • I would like to thank the members of my dissertation committee, Paul Healy, Krishna Palepu, and Eddie Riedl for their invaluable suggestions and support. I am grateful to Abbie Smith (editor), an anonymous referee, David Aboody, Ray Ball, Phil Berger, Alexander Bleck, Mark Bradshaw, George Foster, Claudine Gartenberg, Trevor Harris, Chris Higson, Jack Hughes, Raffi Indjejikian, Ioannis Ioannou, Michael Kimbrough, Andrei Kovrijnykh, Venkat Kuppuswamy, Christian Leuz, Maria Loumioti, Russell Lundholm, Greg Miller, Doron Nissim, Karthik Ramanna, Cathy Shakespeare, Shyam Sunder, Irem Tuna, Ro Verrecchia, Joe Weber, Holly Yang and seminar participants at London Business School, University of Pennsylvania, University of Michigan, Stanford University, UCLA, Columbia University, University of Chicago, Yale University, Harvard University, and London School of Economics for many helpful comments. Special thanks go to Joanne Horton and Richard Macve. Technical and industry expertise from PwC, KPMG, and Tillinghast Towers Perrin was very helpful. I also thank the International Association of Insurance Supervisors for giving access to the database of insurance laws and regulations and Sarah Erickson from Harvard Business School research services for helping me to obtain access. Many thanks go to two anonymous investment banks that provided me with data. I would also like to thank many research analysts, fund managers, and corporate executives that agreed to be interviewed. The financial support of the ICAEW's charitable trusts is gratefully acknowledged. I am solely responsible for any remaining errors.


I analyze Embedded Value (EV) reporting by firms with life insurance operations to assess the impact of unregulated financial reporting on transparency and to examine the institutional characteristics that promote unregulated reporting. Under EV accounting, the present value of future cash flows from in-force contracts is included in shareholders’ equity, and profit is calculated as the change in equity between two periods. In contrast to Generally Accepted Accounting Principles (GAAP), this approach produces higher shareholder's equity and recognizes income at contract inception. I find firms that adopt EV reporting exhibit a decline in information asymmetry, with the decline increasing as EV reporting evolves to address methodological deficiencies and to permit more comparability across firms. The decrease in information asymmetry is contingent on providing an audit certification, and larger for firms that commit to providing EV reports. Moreover, I document that EV reporting is more widespread in countries with more hostile takeovers, managers that do not avoid volatile income measures, regulators that are less likely to intervene in the product market, and analysts that believe EV disclosure increases the value of their information intermediation function.