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Personal vs. Corporate Goals: Why do Insurance Companies Manage Loss Reserves?

Franco Fiordelisi, Antonio Meles, Stefano Monferrà and Maria Grazia Starita

MPRA Paper from University Library of Munich, Germany

Abstract: This study analyses the determining factors of reserve errors in publicly listed property and casualty insurance companies in the U.S. This subject deserves special attention because the previous literature does not control for trade-offs between executive remuneration and other incentives regarding such insurers’ discretionary accounting choices. We find that insurance managers manipulate loss reserves to increase their stock-based remuneration and to achieve corporate goals particularly those goals that relate to reducing tax burdens and obscuring financial weakness. We also observe that enactment of the Sarbanes-Oxley Act has constrained the loss reserve underestimation and changed the structure of reserve error incentives.

Keywords: P&C insurers; reserve manipulation; executive compensation (search for similar items in EconPapers)
JEL-codes: G22 G32 M42 (search for similar items in EconPapers)
Date: 2013-06-24
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-hrm and nep-ias
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