Incentives for Discretionary Accounting Practices: Ownership Structure, Earnings, Size, and Taxation

Abstract

Factors that motivate insurers' choices of accounting practices are established through agency theory and political cost theory. This study hypothesizes that ownership control, earnings, and size provide incentives for the management of insurers to exercise incomeincreasing or -decreasing accounting choices. A series of t-tests establishes an empirical association between accounting choices and the hypothesized explanatory variables. We find evidence that income-increasing behavior is associated with the level and growth of earnings. Income-decreasing behavior is associated with ownership control. The accounting choice literature indicates that the motives for write-offs may differ from those associated with clearly discretionary income-decreasing accounting choices. When write-offs are evaluated independently, the evidence supports an empirical association between incomedecreasing behavior and ownership control, level of earnings, and size. Due to the unique tax environment in 1984 and 1987, a sample was created to include only those insurers with a fresh start tax adjustment in 1984. Using this sample, we perform a Wilcoxon twosample test for differences between insurers that elect income-increasing events and those that do not. Controlling for the tax environment in 1984, significant differences in ownership control and size are reported.