Making Financial Goals and Reporting Policies Serve

Abstract

The main. nancial goal of Progressive Insurance, the third largest underwriter of auto insurance in the U.S., has remained the same since the late 1960s. Expressed in three words, “96 and grow,” the goal tells the company's managers to pursue all growth opportunities while maintaining a “combined ratio” no higher than 96, or what amounts to a minimum 4% spread between revenues (premiums) and costs (including expected losses). Thanks in part to the clarity of mission provided by this goal, the company has produced an average 15% rate of growth in revenues and earnings, along with a remarkably stable 15% return for its shareholders, since going public in 1971. Progressive's simplicity and clarity of mission is also partly responsible for another of the company's distinctive policies: product pricing that, while disciplined, is aggressive and highly decentralized. Having invested some $500 million per year developing statistical models for pricing individual customer risks and acquisition costs, the company was among the. rst in its industry to underwrite “non‐standard” risks. And aided by sophisticated pricing models, each of Progressive's 100 or so local product managers are charged with adapting those models to come up with premiums for their own regions. To go along with its strategic and organizational innovations, Progressive also has an innovative disclosure policy. Apart from SEC reports, the company's communications seldom mention earnings or earnings per share, and the company has never provided earnings guidance. With the passage of Reg. FD in late 2000, the company brie. y considered offering guidance. But in the spring of 2001, the board decided instead to provide monthly releases of its realized combined ratio. Since adoption of this new disclosure policy, Progressive has seen a 50% drop in the volatility of its stock price.

Earnings Pressure and Competitive Behavior: Evidence from the U.S. Electricity Industry

“…In general, a management can respond to earnings pressure in multiple ways, such as ignoring it (King, 2004), managing expectations (earnings guidance) by communicating more effectively with capital market agents (Bernhardt & Campello, 2007), engaging in "creative accounting" (such as capitalizing rather than expensing some costs, or managing discretionary accruals) (Degeorge, Patel, & Zeckhauser, 1999), or making business decisions to accommodate the pressure (Graham et al, 2005). Researchers in accounting and finance have explored how earnings pressure may affect financial communications and accounting manipulations (Burgstahler & Eames, 2006) and have revealed dramatic stock reactions when firms miss earnings forecasts (Skinner & Sloan, 2002).…”

Does the New European Banking Regulation discourage Earnings Management?

“…Davidson, Stickney & Weil (1987) and Guan, He & Yang (2006) observe that earnings management is a set of choices aimed at the achievement of a high level of earnings reported in accordance with GAAPs (Generally Accepted Accounting Principles). Management can deal with pressure situations aiming at the achievement of specific levels of earnings in different ways: i) ignoring them (King, 2004); ii) disclosing financial information in a more effective way with the investors to manipulate their expectations (Bernhardt & Campello, 2007); iii) implementing "creative accounting" techniques, such as the choice to capitalize some costs rather than report them into the income statement (Degeorge, Patel & Zechhauser, 1999); iv) making management decisions to relieve pressure (Graham, Harvey & Rajgopal, 2005). …”

Effect of analysts’ earnings pressure on marketing spending and stock market performance

“…Past research in accounting, finance, and strategy has explored four ways in which top executives respond to pressures from analysts' earnings expectations; (a) by ignoring it (King, 2004); (b) managing expectations (earnings guidance) by communicating more effectively with capital market agents (Bernhardt & Campello, 2007); (c) engaging in "creative accounting", such as capitalizing rather than expensing some costs (Burgstahler & Eames, 2006;Degeorge et al, 1999) or (d) altering business decisions (e.g., cutting spending) to accommodate analysts' pressures (Graham et al, 2005). Our study focuses on the fourth type of response to analysts' earnings expectations.…”