Quantifying the Costs of Intertemporal Taxable Income Shifting: Theory and Evidence from the Property-Casualty Insurance Industry

2004 ◽  
Author(s):  
David W. Randolph ◽  
Gerald L. Salamon ◽  
Jim A. Seida
Keyword(s):  
Insurance Industry ◽  
Income Shifting ◽  
Taxable Income ◽  
Property Casualty

Quantifying the Costs of Intertemporal Taxable Income Shifting: Theory and Evidence from the Property-Casualty Insurance Industry

2005 ◽  
Vol 80 (1) ◽  
pp. 315-348 ◽  
Author(s):  
David W. Randolph ◽  
Gerald L. Salamon ◽  
Jim A. Seida
Keyword(s):  
Cost Function ◽  
Insurance Industry ◽  
Tax Incentives ◽  
Income Shifting ◽  
Parameter Estimates ◽  
Taxable Income ◽  
Quadratic Cost ◽  
The Cost ◽  
Quadratic Cost Function ◽  
Insight Into

This paper presents a model of optimal tax-motivated intertemporal income shifting given a quadratic cost function that relates the costs associated with shifting income to the amount of income shifted. By formally modeling the income-shifting decision, we: (1) show how parameter estimates of the income-shifting cost function can be extracted from a linear regression where a proxy for income shifted is the dependent variable, (2) provide insight into prior tax-motivated income-shifting research, and (3) clarify the interpretation of independent variables that capture the interaction between tax incentives and nontax costs. We then provide an empirical application of our method for quantifying the costs to shift federal taxable income by investigating the income-shifting behavior of firms in the property and casualty (P&C) insurance industry following the Tax Reform Act of 1986. Our results suggest that the parameters of the cost function are negatively related to firm size, the cost to shift a significant amount of income is nontrivial, and the marginal cost to shift income increases as more income is shifted.

scholarly journals Corporate governance, audit quality and risk taking in the U.S. property casualty insurance industry

2009 ◽  
Vol 7 (1) ◽  
pp. 84-95 ◽  
Author(s):  
Chia-Ling Ho ◽  
Gene Lai ◽  
Jin-Ping Lee
Keyword(s):  
Corporate Governance ◽  
Risk Taking ◽  
Audit Quality ◽  
Net Present Value ◽  
Insurance Industry ◽  
Deep Understanding ◽  
Sarbanes Oxley ◽  
The Impact ◽  
The U.S ◽  
Property Casualty

This paper examines the impact of corporate governance and audit quality on risk-taking in the U.S. property casualty insurance industry. The evidence shows that some corporate governance variables, as well as some audit quality variables are related to risk-taking. We find that longer board tenure is associated with low underwriting risk. But the higher percentage of financial experts on the board is associated with high underwriting risk. The possible reason is that financial experts possess a deep understanding of a firm’s financial situation and may encourage the management to take higher risk in anticipation of a higher return for a positive net present value project. The results are consistent with agency theory and wealth transfer hypothesis in that high risk taking is consistent with shareholder interest maximization. In addition, we find a non-monotonic relation between insider ownership and leverage risk. Finally, we do not find evidence that the Sarbanes-Oxley act have impact on the risk taking behavior.

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