A Critical Note on Empirical Comprehensive Income Research

Betriebswirtschaftliche Forschung und Praxis 06/2007;
Source: RePEc


This paper presents a critical analysis of empirical comprehensive income research, the majority of which consists of value relevance studies. The first part of the analysis focuses on the functional form of the value relevance regressions. The paper distinguishes between the informational and the measurement approach to value relevance research and systematically traces the origin of the specifications under both approaches. The informational approach is characterized by diversity in functional form specifications, which can be traced to differences in expectations models for earnings or price/earnings ratios. In the light of this diversity, it is remarkable to observe that most of the authors provide little or no argumentation for the choice of their particular functional specification. While the authors under the measurement approach try to legitimize their regression specifications by referring to the work of Ohlson, in fact, one of the contributions of the residual income model is that it demonstrates the restrictive nature of these specifications. The second part of the paper performs a detailed investigation of the empirical findings. This analysis reveals several peculiarities that defy economic intuition. These peculiarities are nontrivial since they, together with the low explanatory power of the regressions, affect the credibility of the main research findings. The conclusion of the paper is that there is danger in taking the empirical findings of this research domain at face value and that the potential for informing standards setters is limited.

Download full-text


Available from: Ignace De Beelde, Oct 14, 2015
45 Reads
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: The IASB comprehensive income project extends the ‘fair value’ measurement conceptfrom the balance sheet into the income statement. This article extends prior research, primarilybased on Anglo-Saxon countries, by using a comprehensive data set of 56,700 European firm yearsover sixteen countries. We find that other comprehensive income provides incremental informationto investors – due to unrealised available-for-sale securities component – and affects analysts’decision to revise price estimates. On the other hand, traditional operating net income dominatesaggregated comprehensive income as a valuation metric and in predicting cash flows. Results arerobust to pooled and country specific regressions, controls for non-linearities, impact of reportingincentives, and the underlying accounting framework (local GAAP, US GAAP, IFRS). We also findthat aggregated comprehensive income switches the conservative attributes of income towards amore timely recognition of good news over bad news, reducing the conservative agency contractingrole. One possible explanation is the mixing of different concepts of operating capital incrementswith unrealised gains and realised historic net income. An agenda item for the IASB is how incomereporting should be disaggregated with a clear delineation on capital increments, conservativeoperating income, and unrealised financial gains. This is especially important in ContinentalEurope which relies to a greater extent on debt capital and has an under-developed corpus ofequity financial analysts.