The Effect of Corporate Taxation on Loss Provisioning of Property-Casualty Insurers: Evidence from the Adoption of SSAP 101

58 Pages Posted: 6 Jun 2019

See all articles by Jiang Cheng

Jiang Cheng

Lingnan University

Travis Chow

Singapore Management University - School of Accountancy

Tzuting Lin

National Taiwan University - Department of Finance

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: May 19, 2019

Abstract

When provisions for losses are tax deductible, firms confront the dilemma of whether to accrue higher losses, which while reducing current taxes, will also lower reported earnings. In this paper, we examine how the adoption of Statement of Statutory Accounting Principles (SSAP) 101, a recent accounting standard that significantly limits management’s discretion in the recognition and measurement of tax contingencies, affects the loss provisions of property-casualty insurers. We find a significant decrease in loss provisions after SSAP 101 for private insurers over public ones, which have been subject to a similar accounting standard under GAAP. The result is consistent with SSAP 101 resulting in an equilibrium shift away from using loss accruals to avoid tax. Additionally, private insurers exhibit increased persistence in both loss provisions and earnings and decreased volatility in their return on assets, suggesting that financial reporting quality improves when incentives to distort earnings for tax purposes are constrained. Overall, our study offers important insight into how corporation taxation and accounting standards affect the insurance industry’s accounting choices.

Keywords: Loss Provisions, Corporate Taxation, Insurance Companies, SSAP 101

JEL Classification: G22, H25, H26, M41

Suggested Citation

Cheng, Jiang and Chow, Travis and Lin, Tzuting and Ng, Jeffrey, The Effect of Corporate Taxation on Loss Provisioning of Property-Casualty Insurers: Evidence from the Adoption of SSAP 101 (May 19, 2019). Available at SSRN: https://ssrn.com/abstract=3390752 or http://dx.doi.org/10.2139/ssrn.3390752

Jiang Cheng

Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Travis Chow

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
+65 6808 5450 (Phone)

Tzuting Lin

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Jeffrey Ng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Register to save articles to
your library

Register

Paper statistics

Downloads
16
Abstract Views
220
PlumX Metrics