Investment portfolio management to meet or beat earnings expectations

Abstract Insurers can boost their earnings by accruing interest income from their corporate bond investments. We document that insurers have higher corporate bond investments as well as less equity and cash holdings, when their parents meet or just beat analysts’ quarterly earnings forecasts, compared to when their parents miss or comfortably beat the forecasts. The investment in corporate bonds to boost earnings is more pronounced when bond offerings provide more opportunities for accruing interest income, when the parent’s corporate governance is weaker, when the parent’s managers have more equity incentives, when insurers face more competition, when other earnings management techniques are used, or when the insurance segment is more important to the parent. Finally, insurers suspected of helping their parents meet or beat earnings benchmarks experience worse investment performance in subsequent years, presumably because, by investing more in corporate bonds, the insurers forgo investment opportunities with higher longer-term returns.