Net Income Measurement, Investor Inattention, and Firm Decisions

63 Pages Posted: 18 Nov 2021 Last revised: 29 Dec 2022

See all articles by Natee Amornsiripanitch

Natee Amornsiripanitch

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Zeqiong Huang

Yale School of Management

David Kwon

Yale School of Management

Jinjie Lin

Yale School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 18, 2022

Abstract

This paper studies the effect of net income measurement on firms' stock prices and investment decisions when investors have limited attention. We build a model to analyze and compare the effects of two income measurement regimes: one includes changes in unrealized gains and losses (UGL) from financial assets (i.e., the inclusive regime), and the other excludes them (i.e., the exclusive regime). The model identifies conditions under which managers reduce investment in financial assets under the inclusive regime. We empirically test the model predictions by exploiting the implementation of ASU 2016-01, which requires publicly traded firms to incorporate changes in unrealized gains and losses from equity securities into net income. Using US insurance company data, we find that insurers' stock returns react more strongly to changes in UGL on equity securities after the rule change. Using a difference-in-differences approach, we find that, by 2020, publicly traded insurance companies cut investments in publicly traded stocks by almost 20%. Insurers that had more analyst coverage were less affected by the rule change. Our results highlight the impact that investor inattention has on firms' stock prices and investment decisions.

Keywords: Net income components, investor inattention, ASU 2016-01, investment allocation decisions

JEL Classification: G11, G14, G22, G30, M41

Suggested Citation

Amornsiripanitch, Natee and Huang, Zeqiong and Kwon, David and Lin, Jinjie, Net Income Measurement, Investor Inattention, and Firm Decisions (January 18, 2022). Available at SSRN: https://ssrn.com/abstract=3963058 or http://dx.doi.org/10.2139/ssrn.3963058

Natee Amornsiripanitch

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Zeqiong Huang (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

David Kwon

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

Jinjie Lin

Yale School of Management ( email )

493 College St
New Haven, CT CT 06520
United States

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