Do Investors Pay Sufficient Attention to Banks’ Unrealized Gains and Losses on Available-for-Sale Securities?

51 Pages Posted: 3 Jan 2019 Last revised: 10 Aug 2020

See all articles by Romain Boulland

Romain Boulland

ESSEC Business School

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Luc Paugam

HEC Paris, Accounting and Management Control Department

Date Written: December 19, 2018

Abstract

Unrealized gains and losses on available-for-sale securities (AFSGL) are included in Other Comprehensive Income (OCI) and directly affect shareholders’ equity but are not included in earnings. We investigate whether unrealized AFSGL help predict future earnings and whether analysts and investors incorporate the information conveyed by unrealized AFSGL in a timely manner. We conduct our investigation on a sample of banks because unrealized AFSGL are material in the banking industry. First, we show that unrealized AFSGL are material and help in predicting next period realized AFSGL and future earnings change. Second, we document that financial analysts are slow to react to unrealized AFSGL and update their forecasts after AFSGL are realized in earnings. Third, we find that investors are also slow to react to unrealized AFSGL and do so only after AFSGL is included (realized) in earnings and after financial analysts update their forecasts. We document an annual difference of 5% in future abnormal returns between banks in the top and bottom quintiles of past unrealized AFSGL. A zero-cost trading strategy that relies on public information about unrealized AFSGL generates a sizeable monthly alpha that ranges between 1.8% and 1.9%.

Keywords: other comprehensive income, available-for-sale securities gains and losses, investor reaction, investor attention, analyst reaction

Suggested Citation

Boulland, Romain and Lobo, Gerald J. and Paugam, Luc, Do Investors Pay Sufficient Attention to Banks’ Unrealized Gains and Losses on Available-for-Sale Securities? (December 19, 2018). European Accounting Review Volume 28, Issue 5, pp. 819-884, HEC Paris Research Paper No. ACC-2019-1326, Available at SSRN: https://ssrn.com/abstract=3303795

Romain Boulland

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Luc Paugam (Contact Author)

HEC Paris, Accounting and Management Control Department ( email )

1 avenue de la libération
Jouy-en-Josas, 78350
France

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