Comparing the Usefulness of Net Income Versus Comprehensive Income in Terms of Firm Performance: Borsa Istanbul Case

Abstract

Based on the ongoing claims that comprehensive income measures financial performance better than net income, thus enhance the transparency and usefulness of financial statements, International Accounting Standard No.1 (IAS 1) allows reporting comprehensive income in a primary and separate financial statement. From this point forth, we compare the usefulness of comprehensive income with net income in terms of financial performance proxied by stock price, stock returns and operating cash flows. Using a sample of listed companies in Turkey, we find some evidence that comprehensive income is a better measurement than net income, especially explaining stock price and market returns. However, the association between comprehensive income and stock price is negative. In that sense, our findings are consistent with previous researches arguing that investors find the financial information in comprehensive income is more volatile, risky, transitory and incomplete than net income, resulting in decreased stock price.

المقدرة النسبیة لصافی الدخل والدخل الشامل ومکوناته فی التنبؤ بالتدفقات النقدیة المستقبلیة وصافی الدخل والدخل الشامل دراسة تجریبیة مقارنة علی الشرکات المسجلة فی سوق البورصة المصریة (باللغة الإنجلیزیة)

“…Analysis of the previous three models did not provide conclusive evidence concerning the superiority of comprehensive income over net income in predicting future operating cash flows, net income and comprehensive income for one period ahead. This result contrasts Dhaliwal et al (1999), Kanagaretnam (2009), Victoria (2015) and Acar and Karacaer (2017) who found evidence for the superior predictive ability of net income to comprehensive income. In addition, this result also contradicts Wakabayashi (2002), Goncharov and Hodgson (2008) and Khan (2012) who provided evidence for the superiority of comprehensive income over net income in predicting future cash flows.…”

“…Such a result indicates the absence of a significant difference in the predictive power of net income and comprehensive income with regard to future cash flows resulting in rejecting hypothesis H 1 providing an evidence that the predictive ability of net income for future cash flows does not differ from that of comprehensive income for companies listed in the Egyptian stock exchange. This result contrasts Dhaliwal et al (1999), Kanagaretnam (2009), Victoria (2015) and Acar and Karacaer (2017) who found evidence for the superior ability of net income to compre-hensive income in predicting future cash flows justifying their results by the less transitory nature of net income compared to comprehensive income. In addition, this result also contradicts Wakabayashi (2002), Goncharov and Hodgson (2008) and Khan (2012) who provided evidence for the superiority of comprehensive income over net income in predicting future cash flows.…”

“…Accordingly, it had been mandatory for firms to distinctly disclose comprehensive income as a separate line item in the firm's financial statements starting from the fiscal year 1997 in compliance with SFAS 130 where as firms are granted the option to report comprehensive income either as part of the income statement or in the statement of changes in equity. For companies listed with the European Union, the disclosure of comprehensive income and its components has become mandatory in accordance to IAS 1 in the fiscal year 2007 which provided firms with the choice of reporting profits and losses and other comprehensive income in two separate but consecutive statements (profit and loss statement and comprehensive or one single combined statement (Acar and Karacaer 2017).…”

“…Second this study contributes to research on comprehensive income as it uses "actual data" in contrast to prior research that had tended to use "as-if-data" methodology (Acar and Karacaer 2017). Prior research concerned with studying the predictive power of net income versus comprehensive income used "as if" constructed data rather than reported data as (Dhaliwal et al 1999 andGoncharov andHodgson 2011).…”

Reporting comprehensive income and firms' earnings management

“…The study revealed a favorable effect (Eva, María-Del-Mar, & Samuel, 2018). According to Merve and Semra (2017), investors perceive the financial information contained in comprehensive income to be more volatile, risky, transitory, and incomplete compared to net income, which leads to a decline in stock price.…”