Prior researches (Jordan 2011a, Jordan 2011b) have shown gains trading occurred in the insurance industry. They further explore the influence of implementation of different financial accounting reporting standards and provide the evidence of earning management and gains trading behavior in the insurance industry.
The statement of financial accounting standard in Taiwan still has to face the same problem. The government agency has to prevent the managers of insurance companies from earning management and gains trading behavior. Especially after the implementation of SFAS NO.34 in 2006 in Taiwan, there may be some space for insurance company managers to manipulate the financial ratio and financial reporting.
The value calculated through the valuation method of investment securitieshasbeen closer to the fair value rather than history cost. Although this change of accounting valuation could disclose the fair market value for the investment securities, but it also influences the operating income of each period. And it will further influence the performance of insurance companies. The new financial accounting reporting standard also gives the manager freedom to decide the classification of different financial asset categories. Compared with prior period, after the implementation of SFAS NO.34, we could doubt reasonably that the earning management and gains trading are occurring. There are so many researches about earning management and gains trading focusing on the different industries in Taiwan.
We know the financial industry in particular holds a larger amount of investment securities than other industries. The insurance companies have a large part ofassets investedin the financial securities. As a result, they are more influenced by the implementation of SFAS NO.34. The insurance company managers have to face more pressure as the information disclosing is getting strictly regulated. We assume that the problem of earning management and window dressing is occurring based on different condition to different insurance companies. Based on the previous researches, which include different industries and different countries about the earning management and window dressing, we set up our new assumptions about the financial investment securities classification and the earning management or gains trading. We hope this dissertation could offer the government regulation agencyand investors a
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stepping stone to know the earning management behavior and window dressing of insurance industry. Insurance industry is a highly regulated industry in Taiwan. But the database and information disclosing and researches are far less than those of the banking industry. As the economy grows, the insurance market in Taiwan also develops very well. Hence, the insurance market deserves more attention. We use the database of the implementation of SFAS NO.34 from 2006 to 2011; this database could fully capture the influence of the regulation on the performance of insurance companies. This dissertation is different from the previous literatures; we use the classification of investment securities to identify the financial reports window dressing of insurance companies.
We prove the insurance companies with higher ROA and ROE will tend to classify the investment securities to for-trading financial asset category. It may be because the insurance companies with higher return have higher tolerance for net income volatility. On the other hand, the insurance companies may use the profit of the for-tradinginvestment securities to increase ROA or ROE, and then they will be more inclined to classify the investment securities to the for-trading category. We also find the insurance companies with higher ROA will tend to engage in gains trading.
They do more activetradingsin their investment securities. We also find the leverage of the insurance companies plays an important role for the classification of investment securities. The insurance companies with higher leverage will enjoy the benefit of employing debt, and then they have less need to engage in gains trading to manage their earnings. Their earnings are already boosted by the excess return resulting from the positive financial leverage. In our research, we find the leverage is positively related with for-trading assets, which may be because the insurance companies with higher leverage will need more for-trading assets to increase the liquidity so they will tend to classify the investment securities to for-trading category financial assets.
Finally, we find the current ratio will significantly influence the decision of classifying investment securities for insurance companies. The insurance companies with lower current ratio will tend to classify the investment securities to the available-for-sale financial asset category. This will also avoid the volatility of net income if they classify the investment securities to the available-for-sale financial asset. On the other hand, the current ratio is also positively significantly related with the gains trading behavior for insurance companies. The insurance companies with higher current ratio will have higher demand for liquidity, and they will do more gains
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trading through manipulating the securities investment. By the gains trading behavior, the insurance companies will have higher current ratio or more liquidity to meet their short-term debt.
Our research offers a different point of view from pervious literature to exam the earning management behavior and window dressing financial reports in the insurance industry. We try our best to make the database closer to the information they have inside. But we still experience some missing data in our sample. Because there are so many cases of merger and acquisition happening these years, the foreign insurance companies in Taiwan always change their strategy and many different insurance companies enter or exit Taiwan. This induces difficulty in data collecting and dealing. And the data disclosure of insurance companies in Taiwan is still not completed; it could still get more detailed financial data for researchers if possible in the future. The further research about earning management and gains trading in insurance industry could try to connect with the stock price of insurance companies.
Additionally, after more yearsunder the implementation of SFAS NO.34 in Taiwan, it will be possible to collect more data to exam the managers’ manipulating behavior in different insurance companies. Last, the interested researcher could also focus on the influence of the revision of the SFAS NO.34. As time passes, the government regulatory agency will keep monitoring any earning management or gains trading behaviors between the insurance companies. The future research could further note the new revision and implementation.
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Appendix
Sample Insurance Company List
Bank Taiwan Life Allianz Taiwan Life KuoHua Life New York Life
Taiwan Life Chunghwa Post Shin Kong Life TransGlobe Life
PCA Life FirstAviva Life Fubon Life CIGNA
Cathay Life BNP Paribas TCB Life Global Life AIA(B) Taiwan
China Life Chinatrust Life MassMutual Mercuries Manulife
Nan Shan Life Prudential of Taiwan Chaoyang Life Cardif
Farglory Life HSBC Life Singfor Life
Hontai Life Zurich ACE Life Taiwan