Accounting Standards and Gains Trading

39 Pages Posted: 23 Nov 2021 Last revised: 24 Jan 2023

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: November 17, 2021

Abstract

We examine gains trading behavior under a unique accounting rule in the U.S. life insurance industry. When a bond is sold, the proceeds must be amortized over its remaining maturity. This limits opportunities to manage earnings using realized capital gains and losses (RGL). We find evidence of gains trading to offset operating losses by those firms in highest quartile of RGL; such behavior becomes more extreme in higher quantiles of the RGL distribution. In addition, gains trading is concentrated among non-public firms; publicly-traded life insurers, who report to investors under standards with no amortization rule, do not appear to gains trade. Our study contributes to the literature on earnings management among financial institutions, highlighting the nuances of gains trading when reporting rules dilute the effectiveness of such behaviors.

Keywords: Insurance Accounting, Financial Institutions, Earnings Management, Accounting Standards, Capital Gains

JEL Classification: G11, G22, G28, M41, M48

Suggested Citation

Eastman, Evan and Kim, Kyeonghee and Ragin, Marc A. and Ragin, Marc A., Accounting Standards and Gains Trading (November 17, 2021). 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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