Revisiting the stock market reaction to other comprehensive income and its components: evidence from U.S. commercial banks around ASU 2016-01

Given recent developments in the U.S. banking landscape, particularly regarding investment portfolios and derivatives activities, this study aims to provide new insights about the market pricing of aggregate Other Comprehensive Income (OCI) and its key components in the banking sector surrounding the adoption of Accounting Standards Update (ASU) 2016-01. Using a sample of 8,000 quarterly observations covering the 200 largest commercial U.S. banks over the period 2011-2020, we document significant changes in market reactions following ASU 2016-01 implementation. Our findings show that absolute changes in net income (NI) negatively affect abnormal returns, and this relationship becomes more pronounced after ASU 2016-01 adoption. This suggests that the recognition of unrealized gains and losses on equities in NI has increased earnings volatility, and investor sensitivity to earnings uncertainty. While aggregate absolute OCI changes show no significant relationship with abnormal returns in either period, disaggregated analysis reveals important component-specific effects. ASU 2016-01 increases the informativeness of available-for-sale securities and cash flow hedge components, with the post-ASU effect being particularly weak for cash flow hedges and debt securities. Our evidence suggests that, despite the increased earnings volatility following ASU, investors and financial analysts who include component-level OCI information can better assess a bank's financial performance. Additional analysis shows noteworthy results. Abnormal returns are negatively related to negative changes in OCI. However, the effect of positive changes on abnormal returns becomes positive and significant when 2020 observations are excluded, confirming that the pricing of OCI gains is disrupted under uncertainty.