Market-Consistent or Market Sentiment:An Examination of the Informativeness of Embedded Value Accounting
摘要：Regulators and practitioners tend to consider embedded value reporting to be market consistent and to reflect a life insurer’s realistic valuation. Using a sample of European public life insurers, we examine whether embedded values fully reflect market prices’ information. We use the Heckman two-stage regression to control for life insurers’ endogenous decision to disclose embedded values on a voluntary basis, and find that life insurers with market prices higher（lower） than their embedded values have higher（lower）profitability. The results suggest that embedded values do not capture all dimensions of market prices’ information. Further investigation reveals that the above results are mainly driven by market sentiment. We find that market prices over-react to life insurers’ profitability, resulting in lower（higher） future stock returns for life insurers with high（low）price-to-embedded-value（PEV） ratios. This argument is also supported by the finding that PEV ratios are not related to future profitability but are positively associated with analysts’ overestimation of insurers’ earnings in the long run. Overall, although embedded values do not fully reflect market price’s information, they are less vulnerable to market sentiment than market prices are. This study complements the literature on the informativeness and value relevance of embedded value accounting.