Prior studies document an insignificant effect of unrealized gains/losses (URGL) and a negative effect of realized gains/losses (SGL) on bank stock returns. We argue that these results may reflect the omission of changes in value of other net assets resulting from interest rate changes. We find that after controlling for effects of other (on-balance sheet) net assets, both URGL and SGL have significant positive effects on bank returns in normal periods. But the SGL effect is significantly lower in periods of low capital and earnings. These findings are relevant to the market value accounting debate.

This paper exploits the 1990 change in capital adequacy regulations to construct more powerful tests of capital and earnings management effects on bank loan loss provisions. We find strong support for the hypothesis that loan loss provisions are used for capital management. We do not find evidence of earnings management via loan loss provisions. We also document the reasons for the conflicting results on these effects observed in prior studies. Additionally, we find that loan loss provisions are negatively related to both future earnings changes and contemporaneous stock returns contrary to the signaling results documented in prior work.