Accounting Standards and Gains Trading

69 Pages Posted: 23 Nov 2021 Last revised: 9 Mar 2024

See all articles by Evan Eastman

Evan Eastman

Florida State University

Kyeonghee Kim

Florida State University

Marc A. Ragin

University of Georgia; University of Georgia - Department of Insurance, Legal Studies, Real Estate

Date Written: March 8, 2024

Abstract

The U.S. life insurance industry has a unique accounting rule: when a bond is sold, the proceeds
must be amortized over its remaining maturity. Managers who wish to “gains trade” (strategically sell investments to manage earnings) must engage in extraordinary sales activity to overcome this limitation. Using quantile regression, we find that firms in the highest quantiles of realized capital gains and losses tend to have larger operating losses. This behavior is driven by private life insurers who report to stakeholders under statutory accounting principles, where this accounting rule applies. These insurers appear to gains trade with closer-to-maturity bonds, indicating that the amortization requirement plays a role in the bond sales decision. To the best of our knowledge, we are the first to examine gains trading under this rule; we contribute to the literature by providing evidence of gains trading when accounting standards dilute the effectiveness of such behaviors.

Keywords: Insurance Accounting, Financial Institutions, Earnings Management, Interest Maintenance Reserves

JEL Classification: G10, G22, M41

Suggested Citation

Eastman, Evan and Kim, Kyeonghee and Ragin, Marc A. and Ragin, Marc A., Accounting Standards and Gains Trading (March 8, 2024). Available at SSRN: https://ssrn.com/abstract=3969335 or http://dx.doi.org/10.2139/ssrn.3969335

Evan Eastman

Florida State University ( email )

College of Business
Tallahassee, FL 32306
United States

Kyeonghee Kim (Contact Author)

Florida State University ( email )

College of Business
Tallahassee, FL 32306
United States

Marc A. Ragin

University of Georgia ( email )

610 S Lumpkin Street
Moore-Rooker A417
Athens, GA 30602-6254
United States
7067132775 (Phone)

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

610 S Lumpkin Street
Moore-Rooker A417
Athens, GA 30602-6254
United States
7067132775 (Phone)

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