Management of the Loss Reserve Accrual and the Distribution of Earnings in the Property-Casualty Insurance Industry

43 Pages Posted: 21 Nov 2000

See all articles by William H. Beaver

William H. Beaver

Stanford University

Maureen F. McNichols

Stanford University

Karen K. Nelson

Texas Christian University - Department of Accounting

Date Written: October 2000

Abstract

We document that firms reporting small positive earnings significantly understate the loss reserve accrual. Our findings also indicate that earnings management is not concentrated in these firms, but is pervasive across the entire earnings distribution. Consistent with income smoothing, the firms in the left tail of the earnings distribution understate reserve accruals while those in the right tail overstate reserve accruals. The results are similar for both stock and mutual insurers. We also show that both financially healthy and distressed firms manage earnings to avoid losses, and that both types of firms contribute to an overall appearance of income smoothing and opportunistic regulatory reporting.

Keywords: Earnings management, losses, discretionary accruals, property-casualty insurance

JEL Classification: M41, G22, G28

Suggested Citation

Beaver, William H. and McNichols, Maureen F. and Nelson, Karen K., Management of the Loss Reserve Accrual and the Distribution of Earnings in the Property-Casualty Insurance Industry (October 2000). Available at SSRN: https://ssrn.com/abstract=247702 or http://dx.doi.org/10.2139/ssrn.247702

William H. Beaver

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4409 (Phone)
650-725-6152 (Fax)

Maureen F. McNichols

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

Karen K. Nelson (Contact Author)

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7567 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,041
Abstract Views
4,853
rank
23,464
PlumX Metrics