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

Abstract

Recent developments in the US banking sector, including heightened sensitivity to unrealized losses on securities portfolios, have renewed interest in how investors price other comprehensive income (OCI). Despite the importance of OCI for financial institutions, there is limited evidence on how investors respond to aggregate OCI and its components under the regulatory shift introduced by Accounting Standards Update ASU 2016-01 . This study aims to address this gap by examining whether the market’s pricing of aggregate OCI and its major components changed following the new standard. The study examines 8,000 quarterly observations for the 200 largest US commercial banks from 2011 to 2020. Using a fixed-effects model, it assesses how absolute changes in net income, OCI and the components of OCI affect abnormal returns (ARs). Unlike prior studies that mainly rely on annual data, this research uses quarterly observations to capture a more timely market reaction. Market response is measured through ARs aggregated over the three months following OCI disclosure. The findings reveal significant changes in market reactions following the implementation of ASU 2016-01. More precisely, absolute changes in net income negatively affect ARs, and this relationship becomes more pronounced after ASU 2016-01 adoption. In addition, aggregate absolute OCI changes show no significant relationship with ARs in either period. However, disaggregated analysis exhibits significant component-specific effects: ASU 2016-01 increases the informativeness of available-for-sale (AFS) securities and cash flow hedge components, with a stronger post-ASU market response to hedge-related OCI disclosures per unit of variation, while AFS fluctuations exert a comparable effect for a one-standard-deviation change. Additional analysis shows noteworthy results: ARs are negatively related to negative OCI changes. Nevertheless, the effect of positive changes on ARs becomes positive and significant when 2020 observations are excluded, confirming that the pricing of OCI gains is disrupted under uncertainty. This study has several limitations. First, the baseline analysis ends in 2020 and therefore does not capture the 2022–2023 banking turmoil, when unrealized losses became a central focus for investors and supervisors. Thus, the estimates should be interpreted as a preturmoil benchmark. Second, while we document associations between changes in NI/OCI (and their components) and ARs, we do not fully disentangle whether these effects reflect (i) revisions in investors’ cash-flow expectations or (ii) changes in perceived risk premia or discount rates. Third, banks’ portfolio rebalancing and hedging choices may respond endogenously to the reporting regime, thereby affecting both OCI components and returns. Although we include standard controls, we cannot rule out all forms of time-varying omitted risk exposures. Finally, because the tests use quarterly ARs, the observed reaction may incorporate both immediate market responses and gradual information assimilation. These findings have implications for theory, research and practice, with clear relevance for standard setters, regulators, banks and capital-market participants. For theory, the results suggest that investors’ use of OCI is shaped by presentation and salience. OCI is more informative when examined at the component level than as an aggregate total, consistent with limited-attention interpretations. For research, the evidence motivates future work that disentangles cash-flow expectation revisions from discount-rate (risk-premium) effects and examines whether these channels vary across normal versus stress regimes. For standard setters (e.g. FASB), the findings support clearer and more comparable component-level OCI disclosure to enhance decision usefulness. For policymakers, the results indicate that reporting regimes could provide clearer and more disaggregated OCI disclosure information that would enhance transparency, support market discipline and improve the monitoring of banking-sector vulnerabilities. The findings also have important implications for regulators and supervisors. They emphasize the prudential relevance of unrealized losses on AFS portfolios. This role becomes more pronounced in regimes where such valuation losses are included in regulatory capital and can influence CET1 (Basel Committee on Banking Supervision, 2021; Su et al., 2025). This reading is consistent with supervisory lessons from the 2022–2023 banking stress episode (Board Fed, 2023; Yousaf et al., 2023). For banks and risk managers, the evidence underscores the value of transparent communication about securities-portfolio composition and hedging strategies. For investors and analysts, the results indicate that accounting updates such as ASU 2016-01 can change how markets price earnings volatility and OCI information, reinforcing the need to incorporate reporting-regime shifts when interpreting bank performance and risk. Despite growing interest in how accounting standards affect financial reporting, no prior study has specifically examined ASU 2016-01 within the banking sector. Existing research has largely focused on insurance companies and often uses raw returns to assess value relevance, potentially overlooking the effects of unexpected information. This study addresses that gap by using ARs, a refined measure that captures unexpected market reactions, to evaluate the informativeness of OCI disclosures under ASU 2016-01. The findings offer new insights into how regulatory changes shape investor responses in US commercial banks.