The Capital Market Consequences Associated With Classifying Unrealized Gains and Losses on Available-for-Sale (AFS) Equity Securities in GAAP Net Income

56 Pages Posted: 16 Feb 2022 Last revised: 24 Jan 2023

See all articles by John L. Campbell

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

James M. Carson

University of Georgia

Evan Eastman

Florida State University

Dan Yang

Troy University

Date Written: January 24, 2023

Abstract

The Financial Accounting Standard Board (FASB) recently issued Accounting Standards Update No. 2016-01, which requires firms to report unrealized gains and losses on available-for-sale (AFS) equity securities in net income. This paper uses a difference-in-differences design and a sample of public insurers to examine the capital market consequences associated with this reporting change. We find a significant decrease in firms’ earnings response coefficient (ERC) after the application of this new standard, and this is driven by a decrease in earnings persistence. These results suggests that, after the reporting change, earnings less fully reflect the information investors use when revising their beliefs about firm value. However, our evidence indicates no significant changes in investor assessment of overall firm risk following the reporting change, suggesting that investors appear to understand that the reduction in earnings persistence is not reflective of a change in firm risk.

Keywords: Regulation; Other Comprehensive Income; Information Content; Market-based perceptions of firm risk

JEL Classification: G11, G22, M41

Suggested Citation

Campbell, John L. and Carson, James M. and Eastman, Evan and Yang, Dan, The Capital Market Consequences Associated With Classifying Unrealized Gains and Losses on Available-for-Sale (AFS) Equity Securities in GAAP Net Income (January 24, 2023). Available at SSRN: https://ssrn.com/abstract=4032821 or http://dx.doi.org/10.2139/ssrn.4032821

John L. Campbell

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

James M. Carson

University of Georgia ( email )

Athens, GA 30602-6254
United States

Evan Eastman (Contact Author)

Florida State University ( email )

College of Business
Tallahassee, FL 32306
United States

Dan Yang

Troy University ( email )

Troy
AL
United States

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