INCENTIVES FOR DISCRETIONARY ACCOUNTING PRACTICES - OWNERSHIP STRUCTURE, EARNINGS, SIZE, AND TAXATION

Factors that motivate insurers' choices of accounting practices are es tablished through agency theory and political cost theory. This study hypothesizes that ownership control, earnings, and size provide incent ives for the management of insurers to exercise income-increasing or - decreasing accounting choices. A series of t-tests establishes an empi rical association between accounting choices and the hypothesized expl anatory variables. We find evidence that income-increasing behavior is associated with the level and growth of earnings. Income-decreasing b ehavior is associated with ownership control. The accounting choice li terature indicates that the motives for write-offs may differ from tho se associated with clearly discretionary income-decreasing accounting choices. When write-offs are evaluated independently, the evidence sup ports an empirical association between income-decreasing 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 tho se insurers with a fresh start tax adjustment in 1984. Using this samp le, we perform a Wilcoxon two-sample test for differences between insu rers that elect income-increasing events and those that do not. Contro lling for the tax environment in 1984, significant differences in owne rship control and size are reported.