David L. Eckles is with the Terry College of Business, University of Georgia. Martin Halek is with the School of Business, University of Wisconsin. Rongrong Zhang is with the College of Business Administration, Georgia Southern University. David Eckles can be reached via e-mail: email@example.com.
Information Risk and the Cost of Capital
Article first published online: 11 JUL 2013
© The Journal of Risk and Insurance, 2013
Journal of Risk and Insurance
Volume 81, Issue 4, pages 861–882, December 2014
How to Cite
Eckles, D. L., Halek, M. and Zhang, R. (2014), Information Risk and the Cost of Capital. Journal of Risk and Insurance, 81: 861–882. doi: 10.1111/j.1539-6975.2013.01526.x
- Issue published online: 23 NOV 2014
- Article first published online: 11 JUL 2013
This article applies a unique accruals measure to empirically test whether accruals quality affects the cost of capital for property–liability insurers. We utilize insurer loss reserve errors to accurately measure the quality of accruals. This measure, as well as conventional accruals measures, is used to investigate the extent to which accruals quality is priced into both debt and equity capital. We find that accruals quality is priced into debt capital; however, we find virtually no evidence that accruals quality is priced into equity capital. Our results should be of particular interest to insurers as it affects pricing ability. Specifically, insurers who provide primary debtholders (i.e., policyholders) less information risk are able to command higher prices. Furthermore, our results suggest that insurance is not a diversifiable asset.