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Net Income Measurement, Investor Inattention, and Firm Decisions
When investors have limited attention, does the way in which net income is measured matter for firm value and firms’ resource allocation decisions? This paper uses the Accounting Standards Update (ASU) 2016-01, which requires public firms to incorporate changes in unrealized gains and losses (UGL) on equity securities into net income, to answer this question. We build a model with risk-averse investors who can be attentive or inattentive and managers who choose how much to invest in financial assets to maximize firms’ stock prices. The model predicts that, with inattentive investors, ...