Abstract
The comprehensive income statement was adopted as the standard type of financial statement in 2011, and other comprehensive income (OCI) was included in the text of the financial statements. While OCI (unrealized income) is less sustainable than net income, it can help to assess a firm’s value. Therefore, testing the usefulness of OCI is important in analyzing whether persistence of earning information affects a firm’s value. The text of the financial statements enables market participants to access not only the realized net income (operating income, non-operating income), but also information on comprehensive income, which has not yet been realized. Although levels of realized and unrealized income indicate an increase in net worth, changes in realized and unrealized income differ in terms of uncertainty; it is, therefore, more important for market participants to judge information’s usefulness. This study examines whether OCI increases earnings response coefficients (ERC). We analyzed the information content of OCI before and after international financial reporting standards (IFRS) to verify whether the information content varies as the format of OCI reporting changes from a footnote to the main text of the financial statement. In addition, we analyzed dividing OCI into positive OCI and negative OCI. The analysis showed that under the condition in which the realized income is constant, OCI (which is unrealized earnings) has additional information effects. This means that differences might be observed in the decision-making process depending on whether or not the OCI information is used.
Highlights
The argument about which type of earnings reported in the financial statements will provide the most useful information for accounting is a constant topic of debate in the study of the usefulness of accounting information.Dhaliwal et al (1999) [1] analyzed the relationship between net income, total comprehensive income, and stock returns using U.S data, and found no evidence that the explanatory power of total comprehensive income was higher than that of net income
The mean of RET was 0.086, which represents the average response to positive, negative, and no-news surprises. ∆OI indicates the unexpected operating income, which corresponds to the change in operating income from the previous year scaled by the lagged total asset. ∆NOI indicates the unexpected non-operating income, which corresponds to the change in non-operating income from the previous year scaled by the lagged total asset. ∆OCI indicates the unexpected other comprehensive income, which corresponds to the change in other comprehensive income from the previous year scaled by the lagged total asset
Most of the control variables have a significant association with RET, especially for the strongly negative coefficients on SIZE and LOSS, and the positive coefficients on OCF
Summary
The argument about which type of earnings reported in the financial statements will provide the most useful information for accounting is a constant topic of debate in the study of the usefulness of accounting information. In a previous study in Korea, in which the value relevance of other comprehensive income (OCI) items was analyzed using Ohlson’s (1995) residual income valuation model, OCI items showed significant explanatory power on stock prices and returns (Choi and Ahn 2002 [4]; Song et al.2005 [5]). These studies generally accept the value relevance of other comprehensive income, but differ considerably in the usefulness of OCI reporting methods.
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