Information Content of Earnings and Earnings Components of Commercial Banks: Impact of SFAS No. 115

Authors: Jaggi B.¹; Zhao R.²

Source: Review of Quantitative Finance and Accounting, Volume 18, Number 4, June 2002 , pp. 405-421(17)

Publisher: Springer

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Abstract:

SFAS No. 115 modified classification of debt and equity securities held by firms and also modified the reporting format for unrealised gains/losses on security transactions (URGL). This study investigates whether implementation of SFAS No. 115 improved information content of earnings and earnings components of commercial banks. Improvement in the information content is measured by comparing the association between equity returns and earnings and earnings components of the post-adoption period of SFAS No. 115 with the pre-adoption period.

The test results indicate that the association of equity returns with earnings components and aggregate earnings is significantly stronger in the post-adoption period compared to the pre-adoption period. The improvement is especially evident for the components of URGL and non-interest revenues. These results suggest that information provided by earnings components is considered more value relevant for investment decision after implementation of SFAS No. 115. Findings on non-interest revenues indicate that revenues from banking activities other than lending also play an important role in the commercial banks' profitability.

Keywords: commercial banks; earnings components; security transaction; unrealized gains and losses

Language: English

Document Type: Regular paper

Affiliations: 1: Department of Accounting and Information Systems, Faculty of Management, School of Business, Rutgers University, Piscatway, NJ 08854 Tel.: 732-445-3539, Fax: 732-445-3201 and City University of Hong Kong, Hong Kong Jaggi@Business.Rutgers.edu 2: Department of Accountancy, Faculty of Business, City University of Hong Kong

Publication date: 2002-06-01