Why Do Banks Gain and Loss Sell Securities

59 Pages Posted: 9 Jan 2020 Last revised: 23 Dec 2023

See all articles by John Aland

John Aland

University of Notre Dame - Mendoza College of Business

Jeffrey J. Burks

University of Notre Dame

Date Written: December 20, 2023

Abstract

This study deepens and expands insights about banks’ practice of selling securities based on the
gain and loss positions. The main finding in a long literature on this topic is that banks gain and
loss sell to smooth reported earnings. We deepen the literature’s understanding of this finding in
two ways. First, we find that the “smoothing” behavior is more precisely characterized as the
boosting of low earnings; banks boost low earnings via gain selling but do not meaningfully
reduce high earnings via loss selling. Second, we find that this earnings-boosting behavior is
more consistent with opportunism than with signaling, and a major opportunistic motive is to
justify dividend payments. Besides gain selling to boost low earnings and justify dividends, we
uncover additional tendencies of banks to sell securities on the basis of their gain and loss
positions. First, on average banks sell 3 percent of their gain positions each quarter compared to
only 2 percent of their loss positions, a difference of 65 percent. Second, banks are much more
aggressive in using gain selling to offset a given amount of loss selling than vice versa. Third, we
find that the gain and loss selling behavior conforms to prospect theory.

Keywords: banks, securities, smoothing, fair value, accounting

JEL Classification: M41, M48

Suggested Citation

Aland, John and Burks, Jeffrey J., Why Do Banks Gain and Loss Sell Securities (December 20, 2023). Available at SSRN: https://ssrn.com/abstract=3506414 or http://dx.doi.org/10.2139/ssrn.3506414

John Aland

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Jeffrey J. Burks (Contact Author)

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

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