Revisiting Bank Motives to Gain and Loss Sell Securities

ABSTRACT Accounting standards exclude most securities gains and losses from net income until the securities are sold, providing incentives to sell securities based on the gain/loss positions. We revisit prior literature and deepen understanding about this behavior among banks in a variety of ways. First, we find that what the prior literature calls earnings “smoothing” is more precisely characterized as boosting low earnings; banks boost low earnings via gain selling but do not materially reduce high earnings via loss selling. Second, we find this behavior more aligns with opportunism than with signaling, and a specific opportunistic motive is to meet the regulatory guideline for dividend payments. Finally, we uncover additional tendencies of banks, which include selling larger portions of gain positions than loss positions, more aggressively using gain selling to offset a given amount of loss selling than vice versa, and selling securities in a pattern that conforms to prospect theory. Data Availability: Bank call report and Y9-C information is available from the WRDS Bank Regulatory Database and from the Federal Reserve Bank of Chicago, respectively. XBRL data are obtained from publicly available 10-K and 10-Q filings through the SEC EDGAR API. JEL Classifications: M41; M48.