This dissertation investigates whether property-causalty insurance firms (P&C firms) managed taxable income in response to the Tax Reform Act of 1986 (TRA86). A transitional provision contained in TRA86 gave P&C firms the incentive to overstate the liability for insurance claims (loss reserves) reported in 1986 by allowing P&C firms to claim permanent tax savings via a special, one-time tax deduction. TRA86 also lowered the maximum corporate tax rate from 46 percent to 34 percent over a period of two years, thereby giving all firms, including P&C firms, the incentive to defer taxable income in both 1986 and 1987.; Prior attempts to determine whether (and how) firms managed taxable income in response to TRA86 have used broad samples to investigate whether firms manage accounting accruals or income statement accounts and have produced limited evidence consistent with the shifting of taxable income. The inability of prior studies to document evidence of taxable income shifting is likely due to either the use of poor taxable income shifting proxies or because taxable income shifting did not occur. I address these issues and provide evidence of taxable income shifting by examining P&C firms' loss reserves. The loss reserve is a material account for which there is a good proxy for its unmanaged amount. Further, management of the loss reserve does not directly impose costs on a P&C firm's customers.; I investigate P&C firms' response to TRA86 in three different ways: (1) I utilize a unique reporting disclosure required of P&C firms to analyze a proxy for actual loss reserve estimation error, a measure of managerial discretion; (2) I analyze the annual relation between net premiums earned and the loss reserves recorded for such premiums; and (3) consistent with the accrual-model literature, I employ an expectations model to estimate expected levels of (i) loss reserves and (ii) accruals other than the loss reserve that are expected to influence taxable income.; The results from the empirical tests provide evidence consistent with P&C firms responding to TRA86 by overstating the loss reserves recorded for the 1986–87 accident years. The evidence also suggests that firm financial strength, financial reporting concerns, and firm tax status influenced the degree to which firms overstated the loss reserve. In contrast, I do not find evidence that P&C firms managed accruals other than the loss reserve.
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