Purpose -The purpose of this paper is to investigate two audit committee characteristicsindependence and expertise of the audit committee -and the property-liability insurers' financial reporting quality, which is proxied by loss reserve error. Design/methodology/approach -The authors' hypotheses are tested using multivariate analysis where the loss reserve error is the dependent variable, and audit committee independence, and four types of audit committee financial expertise (accounting, finance, supervisory, and insurance expertise) are the testing variables. Findings -It is found that accounting, finance, and insurance financial expertise are associated with more accurate loss reserve estimate. In contrast, a supervisory financial expertise and an independence audit committee are not found to be associated with better loss reserve quality.Research limitations/implications -The sample includes publicly-held property-liability insurers. Although the results from publicly-held insurers could provide a good laboratory for such investigation in all insurers, they might be limited due to different organization structures of public vs private insurers. Practical implications -The implications of the study are important for the SEC and NAIC. The results suggest that the requirements on the audit committee financial expertise would be necessary, even in highly regulated industry, such as property-casualty insurance. Originality/value -The paper contributes to the extant literature by studying audit committee characteristics in the insurance industry. It also contributes to the extant literature on audit committee effectiveness by decomposing the financial expertise into four types of financial expertise (accounting, finance, supervisory, or insurance expertise) and investigates which (if any) of these four types of expertise really drives the improvement of loss reserve quality.

PurposeThe purpose of this paper is to examine the relation between chief executive officer (CEO) compensation and firm performance proxied by efficiency estimated from data envelopment analysis (DEA) of the US property‐liability (P&L) insurance industry.Design/methodology/approachThis study was conducted in two stages. First the authors applied DEA model to calculate efficiency scores. In the second stage, a translog model was used to correlate the level and structure of CEO compensation and the efficiency for the sample P&L insurers over the period of 2000‐2006.FindingsFirm efficiency is positively and significantly associated with total CEO compensation. While revenue efficiency is associated with CEO cash compensation, cost efficiency is associated with incentive compensation.Practical implicationsThese findings suggest that while CEO compensation is tied to both revenue and cost efficiency, revenue efficiency is more important in determining cash compensation, and cost efficiency is more prevalent in influencing incentive compensation.Originality/valueThis is the first paper to use efficiency scores as proxies for firm performance to explore the relation between CEO compensation and firm performance in the P&L insurance industry. Due to the nature of insurance business, using efficiency as a performance measurement is more appropriate than accounting and financial ratios since it enables us to net out the effects of differences in exogenous firm‐specific conditions that are beyond management's control.

Purpose The purpose of this paper is to examine how investor sentiment, proxied by Michigan consumer confidence index, affects the choice of defined benefit pension plan discount rates. Design/methodology/approach The authors use multivariate analysis to test our hypotheses. The dependent variable is defined pension plan discount rate and the testing variables are investor sentiment and a dummy variable representing underfunded status. Findings The authors find a negative and significant relation between investor sentiment and pension plan discount rate. During high (low) sentiment periods, pension discount rate tends to be adjusted downward (upward) discretionarily. Further analysis indicates the relationship between pension discount rate and investor sentiment is more pronounced for firms with underfunded pension plans. The results can be explained by limited attention effects, capital budgeting strategy and earning smoothing. Practical implications The empirical results of this study have important implications for corporate governance and regulation. Specifically, the results suggest the need for increased attention from boards of directors, auditors and regulators to reported pension liabilities, especially during periods of high investor sentiment when pension plan sponsors are more likely to adjust down pension discount rate and accordingly to increase pension liabilities. Originality/value The paper contributes to the extant literature by identifying investor sentiment as a new incentive of pension discount rate manipulation. The empirical results of this study also have important implications for corporate governance and regulation.

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PurposeIn this paper, the impact of stock-based compensation and further the joint effects of stock-based compensation and investor sentiment on pension discount rate choice is examined.Design/methodology/approachThe hypotheses is tested using fixed effects models and instrumental variable analysis where pension discount rate is the dependent variable, and stock-based compensation and investor sentiment are our variables of interest.FindingsIt was found that pension discount rate is negatively associated with managers' stock-based compensation. Further analysis indicates that managers with larger stock-based compensation tend to adjust down their pension discount rates in higher (smaller) degree, responding to high (low) investor sentiment.Practical implicationsThe findings provide important insights into how managers use pension discount rates to engage in earnings management. Understanding these relationships has implications for interpreting pension numbers reported in the financial statements and designing pension accounting rules that minimize the possibility that managers take advantage of the complexity associated with pension accounting to influence the reported earnings and executive compensation. Moreover, the findings suggest the need for increased attention from boards of directors, auditors and regulators to reported pension liabilities and service costs, especially for firms paying higher proportion of stock-based compensation to managers and during periods of high investor sentiment.Originality/valueThe findings contribute to the extant literature by identifying the joint impacts of stock-based compensation and investor sentiment as incentives for pension discount rate manipulation. The empirical results of this study also have important implications for corporate governance and regulation.