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Portfolio rebalancing behavior with operating losses and investment regulation

M. Martin Boyer (), Elicia P. Cowins and Willie D. Reddic

International Review of Economics & Finance, 2019, vol. 63, issue C, 313-328

Abstract: Firms should make every attempt to reduce their tax burden by, for instance, preferring higher-yield taxable investments when faced with operating losses and lower-yield tax-exempt investments otherwise. We examine in this paper whether there are impediments to rebalancing which result from a firm's regulatory environment. Using an original measure of investment regulatory stringency that U.S. property and casualty insurers encounter, we find that insurers operating in more stringent regulatory environments receive a lower percentage of their investment income from taxable sources. We conclude that regulatory constraints limit insurers from rebalancing efficiently their investment portfolio in response to operational performance.

Keywords: Statutory accounting principles; Property and casualty insurance; Tax-exempt and taxable securities; Regulatory investment limitations (search for similar items in EconPapers)
JEL-codes: G22 G28 K23 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.iref.2018.10.001

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