Selective Trading of Available-for-Sale Securities: Evidence from U.S. Commercial Banks

Accepted for publication in European Accounting Review in March 2017

51 Pages Posted: 27 Jan 2011 Last revised: 6 Mar 2017

See all articles by Minyue Dong

Minyue Dong

University of Lausanne - Faculty of Business and Economics (HEC Lausanne)

Xiao-Jun Zhang

University of California, Berkeley; China Academy of Financial Research (CAFR)

Date Written: February 18, 2017

Abstract

This paper examines the selective trading of available-for-sale (AFS) securities by U.S. banks after the implementation of fair value accounting under Statement of Financial Accounting Standards No. 115, Accounting Standards Codification (ASC) Topic 320. Our findings suggest firms still engage in earnings management through selective selling of AFS securities despite the mandatory disclosure of unrealized security holding gains and losses in their financial statements. Such activities do not appear to be driven by the lack of reliability of the fair value measure. Instead, the degree of earnings management varies significantly with the reporting format of unrealized AFS security holding gains and losses. We find evidence of earnings management among banks that choose to report unrealized holding gains and losses in the statement of shareholders’ equity. By contrast, we find no such evidence among banks disclosing unrealized holding gains and losses in the income statement.

Keywords: Selective trading; Available-for-sale securities; Disclosure format; Earnings management; Commercial banks; Fair value accounting

JEL Classification: M41, G14

Suggested Citation

Dong, Minyue and Zhang, Xiao-Jun, Selective Trading of Available-for-Sale Securities: Evidence from U.S. Commercial Banks (February 18, 2017). Accepted for publication in European Accounting Review in March 2017, Available at SSRN: https://ssrn.com/abstract=1748626 or http://dx.doi.org/10.2139/ssrn.1748626

Minyue Dong (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Building Antropole 3022, HEC
Mail box No. 38
Lausanne-Dorigny, Vaud. 1015
Switzerland
(41) 21 6923367 (Phone)
(41) 21 6923305 (Fax)

Xiao-Jun Zhang

University of California, Berkeley ( email )

545 Student Services Building
SPC 1900
Berkeley, CA 94720
United States
(510) 642-4789 (Phone)
(510) 642-4700 (Fax)

China Academy of Financial Research (CAFR)

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Shanghai P.R.China, 200030
China

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