Research

Working Papers

"Insider Smile: Insider Trading and Abnormal Returns"

James M. Carson, Peihan Chen, David L. Eckles, Robert E. Hoyt, and Jiyeon Yun, Under preparation for submission 

We examine insider trades surrounding significant changes in firm-level stock prices with insider trading data at both the firm-day level and the insider-firm-day level. With these data and our event study and ex-post regression model methodological approach, our results provide the first evidence of an “insider smile” whereby stock purchases and sales by insiders earn significantly greater abnormal returns following large changes (decreases and increases) in stock prices, versus smaller abnormal returns following small changes in stock prices. The evidence suggests that insiders have informational monopoly power. Further, the abnormal returns were greater for insiders trading in firms with higher levels of information uncertainty and during relatively opaque periods such as during the financial crisis. Insider stock purchases made after the Financial Crisis of 2008 earn smaller abnormal returns, consistent with the notion that stricter regulations such as the Dodd-Frank Act of 2010 help reduce insiders’ profitable trading associated with informational monopoly power.

"Does Enterprise Risk Management Increase Transparency?"

Robert E. Hoyt, Andre Liebenberg, Chip Wade, and Jiyeon Yun, Under preparation for submission 

The advent of Enterprise Risk Management (ERM) has motivated a growing body of research related to its determinants, organization, and value-relevance. While several recent studies test whether ERM benefits firms, there is an absence of studies that examine how ERM can generate value. Our paper provides some initial evidence on one potential source of value from an ERM program; an increase in transparency regarding the firm’s risk profile. Using dispersion in analyst earnings forecasts as a proxy for transparency, we find that firm-level transparency increases following the engagement of an ERM initiative. The increase in transparency is greatest for firms that are operationally and financially opaque.

"The Impact of Enterprise Risk Management on Firm Risk Taking"

David L. Eckles, Robert E. Hoyt, and Jiyeon Yun, Under preparation for submission  

This research investigates whether Enterprise Risk Management (ERM) creates value by allowing firms to take more strategic business risk and greater advantage of opportunities in their core business. Firms that engage in ERM should be able to better understand the aggregate risk inherent in different business activities. With an increased understanding in a firm’s risk profile, ERM adopting firms should take a more strategic approach to risk management and expand risk-taking in areas where they do have a comparative advantage. We find that ERM adopting firms are increasing their share of core risk. They achieve this not through risk substitution with non-core risk, but by increasing their non-core risk. This provides evidence that ERM firms are recognizing interactions among sources of risks and the benefits of natural hedges.

"Fixing Shadow (re)Insurance?"

Jaewon Choi, Evan Eastman, Kyeonghee Kim, and Jiyeon Yun

We examine the effects of regulatory reform on shadow insurance, wherein life insurers arrange reinsurance within the same group for regulatory capital management purposes. The reform imposes more stringent requirements on insurers’ use of reinsurance for XXX/AXXX life insurance products. Historically, the XXX/AXXX reserves requirement has been associated with shadow insurance activity. No regulatory reform directly changed the XXX/AXXX reserve requirements when the shadow insurance regulatory reform took place. Our results suggest that life insurers consistently arrange shadow insurance after the reform. Our study sheds light on challenges in mitigating regulatory arbitrage through regulatory reforms.

"Estimating the Reservation Prices of Life Insurance and Annuity Under Cumulative Prospect Theory"

Jiyeon Yun and Hongmin Zi

This study estimates and analyzes the reservation prices of life insurance and annuity products by applying the method suggested in cumulative prospect theory. We find that individual characteristics such as loss-aversion, age, and gender play an important role in the reservation prices of life insurance and annuity products. For most of the cases, reservation prices increase as interest rates increase. For life insurance, the reservation prices of term life products (10 or 20-year terms) are higher than those of whole life and endowment products. For annuities, the life with 20-year certain has the highest reservation price. The information implied by the reservation prices measured in this study may be useful for insurers’ decision making in pricing, product development and marketing strategies.