An Examination of Deferred Acquisition Cost in Insurance Firms
Date Issued
2010
Date
2010
Author(s)
Liao, Yi-Ping
Abstract
This dissertation consists of two parts. The first study examines valuation implication of deferred acquisition cost (DAC, DPAC) for insurance firms. First, the value relevance of DAC items under U.S.GAAP, characterized by capitalization-amortization approach, is investigated, and results show that DAC items play an important role in valuing firm values and explaining stock returns and future cash flows. Second, the relative usefulness of direct-expensing approach is examined. Both the incremental explanatory power analyses and Vuong’s Z-statistics indicate that capitalizing approach outperforms expensing one in summarizing information. The second study examines the management of deferred acquisition cost (DAC) for financial reporting incentives. The great importance of DAC amortization on insurers’ financial statements and its nature of being sensitive to actuarial estimates affords considerable discretion while management are faced with financial reporting incentives. Results indicate firms manage DAC amortization to smooth earnings, avoid losses and missing analysts’ forecasts, and take the big bath in the context of management change after controlling for economic factors.
Subjects
Deferred acquisition cost
insurance accounting
value relevance
information content
earnings management
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