An evaluation of SFAS No. 130 comprehensive income disclosures

Abstract

In this study, we provide evidence on the pricing of other comprehensive income (OCI) that differs from most evidence in prior research. Prior archival research has largely concluded that OCI is not priced by investors. In contrast, we provide evidence in the post-SFAS 130 period that OCI is priced on a dollar-fordollar basis as is predicted by economic theory for transitory income items. We attribute this finding to our use of post-SFAS 130 as-reported measures of OCI rather than pre-SFAS 130 as-if estimates of OCI measures. Furthermore, we document that two components of OCI, foreign currency translation adjustment and unrealized gains/losses on available-for-sale securities, are priced by investors. In the post-SFAS 130 period, we also find that the type of financial statement in which The views expressed in this article are that of Tom Linsmeier (and his co-authors) and do not present positions of the Financial Accounting Standards Board. Positions of the Financial Accounting Standards Board are arrived at only after extensive due process and deliberations. firms report OCI and its components affects pricing, consistent with the conclusions of prior experimental research. However, our evidence suggests that investors pay greater attention to OCI information reported in the statement of changes in equity, rather than in a statement of financial performance. This could be attributed to investors becoming more familiar in the post-SFAS 130 period with the predominant reporting of OCI and its components in the statement of changes in equity. These findings may be relevant to both the Financial Accounting Standards Board and the International Accounting Standards Board, which jointly are undertaking a new project that, in part, is addressing financial statement presentation of OCI items.

Value-relevance of pension transition adjustments and other comprehensive income components in the adoption year of SFAS No. 158

“…All other firm-specific data are obtained from COMPUSTAT. Our data collection for independent variables also conform to the observations of Chambers et al (2007) that investors pay greater attention to OCI items that are reported in the statement of changes in stockholders' equity rather than in a statement of financial performance. Considering the data availability from the above sources, our final sample includes 697 firms comprising 283 S&P large, 212 S&P mid-cap and 202 S&P small cap firms.…”

“…Chambers et al (2007) demonstrate the total OCI is value-relevant in the post-SFAS 130 adoption years. They further observe investors pay greater attention to OCI information reported in the statement of changes in stockholders' equity.…”

“…158 incrementally value-relevant in the initial adoption year? Furthermore, in view of mixed evidence documented by previous studies (e.g., Dhaliwal et al 1999;Biddle and Choi 2006;Chambers et al 2007) about the valuation consequence of various OCI components, we address the second research question about the value-relevance of OCI items in the SFAS 158 adoption year when the capital market may also evaluate the pension transition adjustment information in pricing stock. 5 2.…”

“…In our analysis, we examine the empirical association between the cross-sectional difference in stock returns and the magnitude of pension transition adjustments and OCI components in presence of earnings measures in the initial adoption year of SFAS 158. Consistent with prior literature on the market valuation of OCI components (e.g., Dhaliwal et al 1999;Chambers et al 2007), we employ the following regression models to evaluate the association between both the level and change in stock returns, and SFAS 158 pension transition adjustments and OCI components in presence of various earning proxies.…”

“…However, if the pension plans are over-funded, the transition adjustment will have the opposite effect, which is to increase stockholders' equity accompanied by an increase in assets or decrease in liabilities. In this analysis, we also examine the value-relevance of OCI components in the SFAS 158 adoption year as a complement to the mixed evidence produced by prior research about their implication for stock price changes (e.g., Dhaliwal et al 1999;Biddle and Choi 2006;Chambers et al 2007). …”