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EARNINGS MANAGEMENT AND TRADE-OFF BETWEEN TAX SAVINGS AND REGULATORY SCRUTINY THE CASE OF SLOVENIAN PROPERTY INSURERS

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Every company wants to be financially sound and to pay as little taxes as possible at the same time. Financial soundness is especially important for insurers as long-term financial stability is required to keep regulatory approval to underwrite insurance. This paper tests two hypotheses. First hypothesis is that Slovenian property insurers overestimate provisions for claims outstanding and, consequently, reduce net income in order to reduce tax liability. Second hypothesis claims that financially weaker Slovenian property insurers underestimate provisions for claims outstanding in order to enhance apparent solvency. Since regulatory and tax reporting are closely linked, both goals cannot be met at the same time. I use regression model to determine whether Slovenian property insurers manage provisions for claims outstanding to achieve tax savings or to avoid regulatory intervention. Results suggest Slovenian property insurers' underestimate provisions for claims outstanding to enhance apparent financial stability. On the other hand it cannot be proven that Slovenian property insurers overestimate provisions for claims outstanding in order to reduce income tax burden.
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Keywords: earnings management; income tax savings; insurer; regulatory scrutiny

Document Type: Research Article

Publication date: 2012-01-01

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  • The International Journal of Management Cases (IJMC) developed in 2002 from its predecessor The Journal of Management Cases, and present case studies across a broad range of management disciplines. The IJMC is the official journal of the CIRCLE Research Centre. CIRCLE (Centre for International Research Consumers, Locations and their Environments) is a virtual research group spreading over 70 universities.
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