Journal of Accounting and Economics
Journal of Accounting and Economics 35 (2003) 347–376
Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry$
William H. Beaver, Maureen F. McNichols, Karen K. Nelson*
Department of Accounting, Graduate School of Business, Stanford University, Stanford, CA 94305, USA Received 2 March 2002; received in revised form 14 January 2003; accepted 27 January 2003
Abstract We document that property-casualty insurers with small positive earnings understate loss reserves relative to insurers with small negative earnings. Furthermore, loss reserves are managed across the entire distribution of earnings, with the most income-increasing reserve accruals reported by small profit firms, and the most income-decreasing reserve accruals reported by firms with the highest earnings. We analyze this pattern separately for public, private, and mutual companies, and find that public companies and mutuals manage loss reserves to avoid losses, but that private companies do not. We also find evidence of reserve management to avoid losses by financially healthy and distressed firms. r 2003 Elsevier B.V. All rights reserved.
JEL classification: M41; G22; G28 Keywords: Earnings management; Earnings distribution; Discretionary accruals; Property-casualty insurance
We appreciate the helpful comments and suggestions of Jerry Zimmerman (the editor), an anonymous reviewer, and workshop participants at the American Accounting Association Annual Meeting, the 11th Annual Conference on Financial Economics and Accounting, Athens University of Economics and Business, Columbia University Burton Workshop, Harvard University Kennedy School of Government, Indiana University, MIT, University of Oregon, Stanford University, and Syracuse University. Research assistance was provided by Qintao Fan and Yvonne Lu. We gratefully acknowledge the support of the Stanford Graduate School of Business Financial Research Initiative. *Corresponding author.
Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry$
William H. Beaver, Maureen F. McNichols, Karen K. Nelson*
Department of Accounting, Graduate School of Business, Stanford University, Stanford, CA 94305, USA Received 2 March 2002; received in revised form 14 January 2003; accepted 27 January 2003
Abstract We document that property-casualty insurers with small positive earnings understate loss reserves relative to insurers with small negative earnings. Furthermore, loss reserves are managed across the entire distribution of earnings, with the most income-increasing reserve accruals reported by small profit firms, and the most income-decreasing reserve accruals reported by firms with the highest earnings. We analyze this pattern separately for public, private, and mutual companies, and find that public companies and mutuals manage loss reserves to avoid losses, but that private companies do not. We also find evidence of reserve management to avoid losses by financially healthy and distressed firms. r 2003 Elsevier B.V. All rights reserved.
JEL classification: M41; G22; G28 Keywords: Earnings management; Earnings distribution; Discretionary accruals; Property-casualty insurance
We appreciate the helpful comments and suggestions of Jerry Zimmerman (the editor), an anonymous reviewer, and workshop participants at the American Accounting Association Annual Meeting, the 11th Annual Conference on Financial Economics and Accounting, Athens University of Economics and Business, Columbia University Burton Workshop, Harvard University Kennedy School of Government, Indiana University, MIT, University of Oregon, Stanford University, and Syracuse University. Research assistance was provided by Qintao Fan and Yvonne Lu. We gratefully acknowledge the support of the Stanford Graduate School of Business Financial Research Initiative. *Corresponding author.
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