Risk relevance and volatility of other comprehensive income in the banking sector: Evidence from European countries

Alberto Incollingo,Manuela Lucchese,Ferdinando Di Carlo

doi:10.22495/cocv17i3art15

Abstract

The aim of this study is to examine the relationship between the risk measures and the volatility of total comprehensive income (TCI), other comprehensive income (OCI), and single OCI components in the European context. Previous studies only cover reporting jurisdictions such as the United States and Canada but never the EU. Based on these premises, this research uses a sample of 166 listed banks, selected from 15 European countries. The results show that there is a significant positive association between the stock return volatility and the volatility of TCI, of OCI, and some of the single OCI components. This study contributes to the international debate on the risk relevance of TCI and its components, observing, in addition to previous research, the association not only between the risk measures and the volatility of TCI and OCI but also between the risk measures and the volatility of single OCI components.

Highlights

This study follows a call for action concerning the direction for future research about the usefulness of total comprehensive income (TCI), other comprehensive income (OCI) and components of OCI for investor and contracting purposes (Black, 2016; Khan & Bradbury, 2016)
The aim of this study is to examine the relationship between the risk measures and the volatility of total comprehensive income (TCI), other comprehensive income (OCI), and single OCI components in the European context
The paper examines the relation between risk measures and the volatility of TCI, OCI and single OCI components in the European context, following recent suggestions for future research according to which many studies in finance use earnings or operating income volatility as a measure of firm risk, so future research might consider how incorporating OCI into these measures will potentially lead to different conclusions (Bao, Billett, Smith, & Unlu, 2020)

Summary

Introduction

This study follows a call for action concerning the direction for future research about the usefulness of total comprehensive income (TCI), other comprehensive income (OCI) and components of OCI for investor and contracting purposes (Black, 2016; Khan & Bradbury, 2016). An examination of the association between the timeseries volatility of financial statements items (TCI, OCI, and single components) and the time-series volatility of the stock/equity return tries to provide evidence for the effects of price moments that does not depend on transitory innovation in the financial statement items (i.e., news about firm fundamentals). In this manner, the study seeks to provide evidence on the risk relevance or, in other words, on the price movements that may not cause a deviation from the mean return that would cause volatility (Black, 2016). Researchers assume that investors efficiently impound the risk-relevant information into equity share prices and that equity share prices represent the investors’ future cash flows (Black, 2016)

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Results

Conclusion