Incentives for managing accounting information: property-liability insurer stock-charter conversions.

ABSTRACT

Incentives to manage accounting information are examined within 63 property-liability insurance company conversions from mutual ownership to for the use of all stock charter. In the conversion proces policyholders' embedded equity claims must be valued. Since mutuals have no separately traded equity, accounting numbers are a critical input in this valuation, incentives for surplus management vary across firms; the strongest evidence of surplus management is observ among firms where the mutual's executives become the firm's principal stockholders following conversion. The evidence indicates that converting firms manage accounting information primarily through adjusting liabilities and selectively establishing investment losses--not by the agency of altering claims settlement policy.