THE EFFECT OF COMPREHENSIVE INCOME PRESENTATION  ON INVESTOR DECISIONS

Li Huang

This research speaks to current practices and unsolved issues on comprehensive income presentation. The recent Accounting Standard Updates (ASU) on comprehensive income presentation offers options for the firms to present other comprehensive income (OCI) information and to report the amounts reclassified out of accumulated other comprehensive income (AOCI). ASU No. 2011-05 requires firms to present the components of other comprehensive income (OCI) with the components of net income (NI) in a single continuous statement (one-statement approach) or to present the OCI information in a separate consecutive statement (two-statement approach). ASU No. 2013-02 requires firms to present the AOCI reclassification information either on the face of the financial statements or as a separate disclosure in the notes to the financial statements. The assumption is that the different options for presenting OCI and AOCI will have the same effect on information users’ judgment. However, both academics and practitioners believe the different presentations will lead to different information processes and thus, might result in different investor decisions. In the first study, using the traditional valuation model in Chambers, Linsmeier, Shakespear and Sougiannis (2007), and Lin, Martinez, Wang and Yang (2016), I test whether the one-statement approach or two-statement approach can influence the valuation of NI and OCI. The results indicate that the NI is less value relevant in one-statement approach than in two-statement approach while the value relevance of OCI is not significantly different between the two presentation options. In the second study, I use an experimental method to examine how the presentation of the AOCI reclassification and OCI information can influence the perception of earnings management and evaluation of financial performance. In a 2 x 2 between-subjects experiment, I manipulate the presentation of the reclassification adjustment and the presentation of the comprehensive income. The result shows that investors are more willing to invest in the firm with earnings management activities when the OCI is presented in two-statement approach. I also find the investing decision is based on the evaluation of the financial performance but not the perception of earnings management.

THE EFFECT OF COMPREHENSIVE INCOME PRESENTATION ON INVESTOR DECISIONS

Files and links (1)

Abstract

Metrics

Details