Effect of Tax on Hedging Activity: Evidence from the United Kingdom Life Insurance Industry

• Main Authors: Yi-ChenLai, 賴逸蓁
• Other Authors: Yung-Ming Shiu
• Format: Others
• Language: en_US
• Published: 2012
• Online Access: http://ndltd.ncl.edu.tw/handle/30702591151924623045

碩士 === 國立成功大學 === 企業管理學系碩博士班 === 100 === There are two main arguments about tax considering to the use of reinsurance-the income volatility reduction and income level enhancement. The income volatility reduction reveals that when firms face convex tax schedules, they incline to hedge for the purpose of reduce the volatility of their annual taxable income and therefore diminish expected tax liabilities. The income level enhancement contends that reinsurance can enhance current reported earnings of firms by means of receiving reinsurance commissions, thus results in increasing of their tax liabilities. Therefore, when the firm face high marginal tax rate tend to buy less reinsurance. Owning to the fact that reinsurance and derivatives are both hedging tools, in my research, I test the two arguments using reinsurance and derivatives as dependent variables through 1985-2010 data for a sample of United Kingdom life insurance firms. The data for firm variables are using the data set of SynThesys life which was provided by Standard ＆ Poor’s. My final sample includes 371 life insurers and 9276 insurer-year observations. I examine the interaction among reinsurance and taxes by 2SLS in my methodology part. I find that life insurance firms with high tax convexity can buy more reinsurance to reduce the income volatility and lower their expected tax liabilities. In addition, those life insurance firms with high marginal tax rate tend to purchase less reinsurance than their low marginal tax rate counterparts. However, income volatility argument is not supported on the purchase of derivatives because tax convexity is found to have no significant influence on the using of derivatives.