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Optimal Weights for Accounting Earnings and Cash Flows for Explaining Stock Return of Insurance Companies

Journal of Insurance and Financial Management

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Title Optimal Weights for Accounting Earnings and Cash Flows for Explaining Stock Return of Insurance Companies
 
Creator Cheng, Joseph
Lam, Alfred Chun Wang
 
Description The objective of this paper is to derive a composite index from earnings and cash flows that could be used to better evaluate insurance companies.One significant difference between earnings and cash flows is depreciation, and in the case of insurance industry, the timing of recognition of premium income and expense paid out to claims can also cause significant difference between earnings and cash flows.   Thus, there might be important components that are found in earnings of insurance companies but not in cash flows, or vice versa.We propose to create a composite index which is a weighted average of accounting earnings and cash flows that can explain stock return better than either earnings or cash flow alone.  The advantage of this approach is that full information would be utilized for evaluating performance of insurance companies. Using this approach, we found that the optimal weight for earnings and cash flow for the insurance industry is found to be approximately 79% and 21%, respectively.  Such information may help managers of insurance firm to better manage the cash flow in order to maximize value of the firm for shareholders.
 
Publisher Journal of Insurance and Financial Management
 
Contributor —
 
Date 2017-09-11
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier https://journal-of-insurance-and-financial-management.com/index.php/JIFM/article/view/98
 
Source Journal of Insurance and Financial Management; Vol 3, No 4 (2017): Journal of Insurance and Financial Management
2371-2112
 
Language eng
 
Relation https://journal-of-insurance-and-financial-management.com/index.php/JIFM/article/view/98/pdf
 
Rights Copyright (c) 2017 Joseph Cheng, Alfred Chun Wang Lam
http://creativecommons.org/licenses/by/4.0