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We investigate the risk relevance of the standard deviation of three performance measures: net income, comprehensive income, and a constructed measure of full-fair-value income for a sample of 202 U.S. commercial banks from 1996 to 2004. We find that, for the average sample bank, the volatility of full-fair-value income is more than three times that of comprehensive income and more than five times that of net income. We find that the incremental volatility in full-fair-value income (beyond the volatility of net income and comprehensive income) is positively related to marketmodel beta, the standard deviation in stock returns, and long-term interest-rate beta. Further, we predict and find that the incremental volatility in full-fair-value income (1) negatively moderates the relation between abnormal earnings and banks' share prices and (2) positively affects the expected return implicit in bank share prices. Our findings suggest full-fair-value income volatility reflects elements of risk that are not captured by volatility in net income or comprehensive income, and relates more closely to capital-market pricing of that risk than either net-income volatility or comprehensiveincome volatility.

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We examine how fair-value-income measurement affects commercial bank equity analysts' risk and value judgments. Normatively, holding information and other underlying economics constant, bank analysts' risk and valuation assessments should distinguish between banks with different risks, but should not depend on how banks measure income. In our experiment, we vary income measurement—full-fair-value (all fair-value changes recognized in income) versus piecemeal-fair-value (some fair-value changes recognized in income, others disclosed in the notes). We also vary interest-rate-risk exposure (exposed versus hedged). We find that bank analysts' risk and value judgments distinguish banks' exposure to interest-rate risk only under full-fair-value-income measurement. Our evidence contributes to research concerned with financial performance reporting, risk, and fair-value accounting by demonstrating that differences in income measurement affect fundamental judgments of specialist analysts. Our findings are striking because they: (1) point toward an important role for measurement and recognition of fair-value gains and losses in income, and (2) suggest that note disclosure is not a substitute for financial-statement recognition (even for professional analysts specializing in banks and working in a context that involves assessment of core operations of a bank). These results should be of interest to accounting standard setters as they evaluate whether to require full-fair-value-income measurement.

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