Journal of Accounting and Economics 35 (2003) 347–376
Management in the loss hold accrual plus the distribution of earnings in the property-casualty insurance industry$ William H. Beaver, Maureen Farreneheit. McNichols, Karen K. Nelson*
Department of Accounting, Graduate School of Business, Stanford University, Stanford, CA 94305, USA Received 2 Drive 2002; received in revised form 16 January the year 2003; accepted 27 January 2003
Abstract We document that property-casualty insurance providers with little positive earnings understate damage reserves in accordance with insurers with small negative earnings. Furthermore, loss supplies are been able across the complete distribution of earnings, with the most income-increasing reserve accruals reported by tiny proﬁt ﬁrms, and the most income-decreasing reserve accruals through ﬁrms together with the highest profits. We analyze this pattern separately to get public, non-public, and shared companies, and ﬁnd that public companies and mutuals manage reduction reserves to prevent losses, yet that personal companies usually do not. We likewise ﬁnd evidence of reserve managing to avoid deficits by ﬁnancially healthy and distressed ﬁrms. r the year 2003 Elsevier M. V. Almost all rights arranged. JEL classiﬁcation: M41; G22; G28 Keywords: Earnings administration; Earnings syndication; Discretionary accruals; Property-casualty insurance
We appreciate the helpful remarks and ideas of Jerry Zimmerman (the editor), a great anonymous reporter, and workshop participants at the American Accounting Association Twelve-monthly Meeting, the 11th Gross annual Conference about Financial Economics and Accounting, Athens College or university of Economics and Business, Columbia College or university Burton Workshop, Harvard College or university Kennedy University of Government, Indiana University, UBER, University of Oregon, Stanford University, and Syracuse School. Research assistance was provided by Qintao Enthusiast and Yvonne Lu. We gratefully acknowledge the support of the Stanford Graduate College of Business Financial Exploration Initiative. *Corresponding author. Present address: Department of Accounting, Jones Graduate School of Management, Grain University, Houston, TX 77005, USA; Tel.: +1-713-348-5388; send: +1-713-348-6331. Email address: [email protected] edu (K. Nelson). 0165-4101/03/$ - find front subject r 2003 Elsevier M. V. Almost all rights arranged. doi: twelve. 1016/S0165-4101(03)00037-5
T. H. Beaver et 's. / Journal of Accounting and Economics 35 (2003) 347–376
1 ) Introduction This kind of study looks at the connection between discretionary loss hold accruals and the distribution of reported earnings for a test of property-casualty (P& C) insurers. Two distinctive top features of the P& C insurance setting motivate studying revenue management through this sector. 1st, required disclosures for a material accrual, what he claims loss reserve, allow us to develop a comparatively reliable measure of management's workout of discernment over revenue. Second, a number of ownership buildings exist in the industry, which include public, private, and shared companies. This kind of variation permits us to examine more directly within most preceding research just how incentives inherent in different ownership structures impact earnings management behavior. Our ﬁrst exploration objective is to examine the relation between management in the loss hold accrual as well as the distribution of reported revenue. For a sample of non-insurance ﬁrms, Burgstahler and Dichev (1997), hereafter BD, and Degeorge et al. (1999) ﬁnd a discontinuity in the distribution of earnings in the area immediately around zero, which they interpret while evidence that ﬁrms manage earnings to stop reporting failures. However , deficient a model of accruals or an estimate of discretionary accruals, there is ambiguity in interpreting these results. We file that P& C insurance providers report tiny positive income with greater frequency than expected presented the family member smoothness of the remainder from the earnings circulation, and that these types of ﬁrms signiﬁcantly understate the loss reserve accrual relative to ﬁrms with...
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