Interaction Effects of Regulatory and Financial Reporting



The insurance industry plays a central role in the global economy by enabling companies and individuals to transfer and diversify idiosyncratic risks. In addition, insurers are among the most important institutional investors, providing long-term and stable funding for investments and growth. The nature of their business exposes insurers to significant insurance and financial risks. Given their central role for the global economy, transparent information on insurers’ risk, financial position, and performance if of crucial importance. Recognizing the economic role and risks of the insurance business, the European Union (EU), and the International Accounting Standards Board (IASB) have recently introduced unprecedented and substantial changes to insurers’ regulatory and financial reporting requirements. Our proposed research projects explore the consequences of these regulatory changes.

First, we analyze whether mandatory Solvency II disclosures affect insurers’ voluntary disclosure of embedded value (EV) reporting, financial reporting quality and subsequent stock liquidity effects. We argue that insurers will increase (decrease) voluntary EV reporting when mandatory Solvency II disclosures negatively (positively) affect their information environment followed by changes in insurers’ information asymmetry and EU insurers’ financial reporting quality. The change in disclosure regulation can induce managers to collect new and higher quality information (i.e., invest in information technology) that improves firms’ internal information quality resulting in better-informed managers and ultimately higher financial reporting quality. Next, we analyze whether the new detailed information in Solvency II disclosures (e.g., fair values) positively affects the performance of peer-based valuation models. Lastly, we explore the anticipated net benefits of IFRS 17 adoption and provide early evidence on the realized benefits of IFRS 17 adoption from the perspective of capital market participants.

We empirically assess effects of Solvency II on insurers’ EV reporting, bid-ask spreads, earnings response coefficients, accruals quality and pricing errors in a differences-in-differences setup using a suitable control group of financial institutions not affected by Solvency II (for example non-EU insurers or EU banks). Our analyses rely on hand-collected Solvency II disclosure data.

Our research adds to our understanding of the consequences of alternative reporting regimes and of the interaction of mandatory and voluntary disclosure and reporting. Related theoretical predictions are ambiguous and empirical evidence on the consequences and potential spillover effects of regulatory reporting regimes is scarce.
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