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Portfolio rebalancing behavior with operating losses and investment regulation

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  • Boyer, M. Martin
  • Cowins, Elicia P.
  • Reddic, Willie D.

Abstract

Firms should make every attempt to reduce their tax burden by, for instance, preferring higher-yield taxable investments when faced with operating losses and lower-yield tax-exempt investments otherwise. We examine in this paper whether there are impediments to rebalancing which result from a firm's regulatory environment. Using an original measure of investment regulatory stringency that U.S. property and casualty insurers encounter, we find that insurers operating in more stringent regulatory environments receive a lower percentage of their investment income from taxable sources. We conclude that regulatory constraints limit insurers from rebalancing efficiently their investment portfolio in response to operational performance.

Suggested Citation

  • Boyer, M. Martin & Cowins, Elicia P. & Reddic, Willie D., 2019. "Portfolio rebalancing behavior with operating losses and investment regulation," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 313-328.
  • Handle: RePEc:eee:reveco:v:63:y:2019:i:c:p:313-328
    DOI: 10.1016/j.iref.2018.10.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Statutory accounting principles; Property and casualty insurance; Tax-exempt and taxable securities; Regulatory investment limitations;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law

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