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

The role of other comprehensive income in analyst valuation: profitability, perception and... 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/approachThis 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.FindingsThe 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/valueThe 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting Research Journal Emerald Publishing

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

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References (31)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1030-9616
eISSN
1030-9616
DOI
10.1108/arj-02-2024-0055
Publisher site
See Article on Publisher Site

Abstract

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/approachThis 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.FindingsThe 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/valueThe 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.

Journal

Accounting Research Journal – Emerald Publishing

Published: Oct 3, 2024

Keywords: Other comprehensive income; Equity analysts; Valuation; Stock rating; Financial manipulation; OCI; Financial analysis

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