The Impact of the Tax Reform Act on the Stock Returns of U.S. Life Insurance Companies

This paper investigates the impact of the Tax Reform Act of 1984(the 1984 Act) which revised the Life Insurance Company Income Tax Act of 1959(the 1959 Act) significantly using two stages. In the first stage an event study is undertaken to examine how the selected life insurance companies were on average affected by the tax law changes in 1984. In the second stage cross-sectional regression analysis is performed to find the sources of the abnormal returns found in the first stage. The empirical results of the event-related analysis in the first stage indicate negative abnormal returns observed around certain events critical to enactment of the 1984 Act. The results of the second stage analysis show that the larger companies writing less life term insurance and less accident and health and goup life insurance with less money invested into the assets providing larger capital gains are found to have experienced smaller negative abnormal returns. Such firms are interpreted to have shifted more of the corporate income tax burdens imposed upon the life insurance companies by the tax law change in 1984. Until now U.S life insurance tax law did not change fundamentally since the Tax Reform Act of 1984 was in effect. Hence, in this paper I try to investigate the impact of the TRA of 1984.