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The role of other comprehensive income in analyst valuation: profitability, perception and performance

Ning Du, Jeffrey Byrne, Robert Knisley, Dwayne Powell, James Valentine

Accounting Research Journal

ISSN: 1030-9616

Article publication date: 12 September 2024

Issue publication date: 3 October 2024

251

Abstract

Purpose

This study aims to examine how financial analysts evaluate other comprehensive income (OCI) information with a focus on the information content and economic substance of OCI gain and loss.

Design/methodology/approach

This study conducted a 2 × 2 between-subject experiment by manipulating profitability (net profit or net loss) and OCI (OCI gain or loss). A total of 103 equity research analysts participated in the experiment.

Findings

The results show that when the company suffers a net loss, the presence of unrealized gain in OCI appears to cause concern for analysts, in that they assigned a lower valuation to the OCI gain company than the OCI loss company. However, in the cases where the company is profitable, analysts appeared to respond to the direction of OCI (i.e. gain or loss) and incorporated the directional information in their valuation judgment.

Originality/value

The experimental results complement prior archival research on OCI valuation. This study extends prior work on OCI’s decision usefulness, improves understanding of the impact of OCI on firm valuation and contributes to the ongoing debate about whether OCI is viewed as a performance measure. The findings indicate that the effect of OCI gains or losses is most pronounced when the company experiences a loss. During such instances, analysts may interpret a combination of net loss and OCI gain as a potential indicator of earnings management opportunities. Consequently, they may perceive it as a signal of deteriorating future financial performance.

Keywords

Acknowledgements

Data availability: Private database maintained by Analyst Solutions, a continuing education provider focused on equity research analysts and continuing education-approved provider of the CFA Institute.

Citation

Du, N., Byrne, J., Knisley, R., Powell, D. and Valentine, J. (2024), "The role of other comprehensive income in analyst valuation: profitability, perception and performance", Accounting Research Journal, Vol. 37 No. 5, pp. 524-539. https://doi.org/10.1108/ARJ-02-2024-0055

Publisher

:

Emerald Publishing Limited

Copyright © 2024, Emerald Publishing Limited

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