Value relevance of other comprehensive income

Abstract: Standard setters have in the past decades favored a new income measure based on fair value accounting; other comprehensive income. In the ongoing, rather ambiguous, discussion there are arguments and empirics both supporting and disagreeing with the usefulness of other comprehensive income. Critique from many practitioners argue that other comprehensive income is not as useful as first argued by IASB, but rather misleading and complex. In an attempt to add more conclusive empirical results to this discussion the aim of this thesis is to examine the association between other comprehensive income and stock price. The sample consist of quarterly data between 2009 and 2013 for 126 European companies and 282 American companies. Due to the recent implementation of other comprehensive income in Europe an effort has been made to manually gather all the available data for the years reported. Two models are developed based on the residual income valuation (RIV) model and the Fama French three factor model, referred to as the redefined RIV model and the five factor model. The redefined RIV model shows a small association between other comprehensive income and stock price, however, this effect appears to depend on the composition of other comprehensive income. Items such as translation differences and cash flow hedges seems to decrease the overall value relevance. The five factor model shows no association between other comprehensive income and stock return after controlling for the standard risk factors. In conclusion, the results do not support any association between other comprehensive income and stock price signifying a relative low usefulness compared to net income, especially for practitioners in the financial markets. In line with our conclusions, in June 2014, the IASB announced a statement which proposed a change of direction back to the profit and loss statement to be the primary information source. As of now, the development appears to take a turn and shifting the focus from other comprehensive income back to the traditional accounting measures.