Investor sentiment and insurers’ financial stability: do sovereign ratings matter?

Abstract This paper examines the nexus between investor sentiment and the insurers’ financial stability and, in addition, the moderating role of negative market conditions on the aforementioned relationship. Using a sample from the property–casualty insurance sector of the developed markets, our findings are twofold. First, we find that investors exhibit rational buying behaviour, and lower investor sentiment does not affect property–casualty insurers’ financial soundness. Second, our findings reveal that the financial market condition does not much alter the investors’ sentiment and financial stability relationship. We interpret our findings from the theoretical perspectives of the q-theory of investment and investor buying behaviour theories. Our findings are robust to the alternative estimation techniques, sensitivity and endogeneity analysis.