Eugene Bland

Income smoothing behavior of U.S. banks under revised international capital requirements

The use of the loan-loss provision to smooth reported income by large bank holding companies is a much-investigated practice. To the extent that the variability of net income is a measure of risk, income smoothing may reduce the perceived riskiness of the bank and thus increase stock value. Managers may have added incentive to smooth income in response to the structure of their compensation package. The Basel Accord of 1988 phased in new definitions of regulatory capital for banks. These changes have increased the incentives for income smoothing. Most previous studies on income smoothing and loan-loss reserves predate the implementation of the Basel Accord. Others use data that include the transition period. This study revisits the subject, using only post-Accord data. Results of this study are compared with previous results. The evidence confirms the continued existence of income smoothing and supports the proposition that banks have become more aggressive in using loan-loss reserves as a tool for income smoothing.

A Practical Approach to Using Taguchi Loss Functions to Rank Investment Choices

We use a series of hypothetical financial situations to describe the manner in which a quantitative technique could assist analysts in making financial decisions. We also provide a detailed example of a portfolio managers attempt to replicate a given stock with another stock that meets multiple characteristics. The demonstrated quantitative technique is an improvement over the traditional “accept/reject” dichotomy because it imposes an explicit penalty for deviations in the observed values from the desired characteristic values, allows multiple characteristics to be considered simultaneously, and also allows the selected characteristics to be weighted based on their relative importance

Prioritizing Investment Screens in a Multiple-Criteria Framework

Investment professionals often screen the investment universe for investment opportunities that meet some benchmark criteria. This screening process provides a subset of acceptable investment opportunities that are not all equally acceptable. A technique that allows prioritization of the subset on the basis of deviations from the benchmark criteria used to obtain it is an adaptation of the Taguchi loss function, which has found application in the management, marketing, accounting, and real estate literature.