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

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 com- mercial 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 implementa- tion 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.