Volatility, value relevance and predictive power of comprehensive income : a thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Accounting at Massey University, Albany, New Zealand
Despite analysts' demands for (and standard setters' preferences for) a single statement of comprehensive income, both the IASB and the FASB have not been able to achieve this objective. Proponents of a single statement presentation argue that comprehensive income brings discipline to managers and analysts as it requires them to consider all factors affecting owners' wealth. Opponents argue that other comprehensive income items are transitory in nature, including them with core business earnings increases the volatility and reduces the predictive power of earnings. Thus, this thesis examines the volatility, value relevance and predictive power of comprehensive income relative to net income. Motivated by the concerns that the volatility of comprehensive income leads to the perception of increased risk, this thesis investigates the volatility and risk relevance of comprehensive income for a sample of non-financial United States (US) and New Zealand (NZ) firms. The findings show that comprehensive income is more volatile than net income. The findings also show that comprehensive income volatility is associated with market-based measures of risk (volatility of stock returns and beta). However, the incremental volatility of comprehensive income (over net income) is not associated with market risk and is not priced. Prior literature documents mixed evidence on the pricing of comprehensive income. The mixed results are attributed to the use of as if measures of comprehensive income, which introduces measurement error. This thesis uses as reported data from US and NZ firms and shows that comprehensive income is more value relevant compared to net income. However, net income is a better measure for predicting future operating cash flows and future net income. These results have important implications for the FASB/IASB in deciding whether to report comprehensive income in a single statement of performance.