A Research On Value Relevance Of Other Comprehensive Income

This paper investigates the value relevance of other comprehensive income and its component isn’t the context of China’s capital market. By building the price model and the returns model, based on data of the financial statements (2009to2011) under the new accounting standards from Shanghai A-share listed companies, this paper investigates the value relevance of net income, other comprehensive income,comprehensive income, particularly empirically studies the investors’ response to disclosure (defined and adjustedin2009) of other comprehensive income and other comprehensive income component firstly.The thesis is arranged into six parts as follows.Section1introduces the background and purposes of this study, the analysis framework and the innovations of the study.Section2reviews the relevant literature, specifically including two aspects, the measurement of accounting conservatism at firm level and the relationship between conservatism and debt.Section3discusses the meaning and categories of accounting conservatism and its role in the Concept Framework, then analyses the effect of conditional and unconditional conservatism on the cost of debt using the contracting theory, and develops the hypotheses.Section4describes the research design, namely the empirical proxies for conditional, unconditional and financial report conservatism, the cost of debt and other determinants of debt cost; the empirical regression model; and data collection.Section5presents the empirical results and conducts some robustness checks to ensure the reliability of the primary results.Section6concludes the thesis by summarizing the findings and the limitations in this study and at last offers some suggestions for future study.Through research, we draw the following conclusions:First, both other comprehensive income and its components with the stock price significantly positive correlation.Second, the value relevance of comprehensive income is weaker than the component of comprehensive income, namely, the investors still pay more attention to the component of comprehensive income, but the explanation power of disaggregated items of other comprehensive income is higher than that of total other comprehensive income.Third, the relationship between each component of other comprehensive income and stock prices makes a great difference. We find evidence that cash flow hedges components are significantly associated with Price and market returns. We also find that other Comprehensive income is more strongly associated (in terms of explanatory Power) with both stock Price and returns compared to net income.And comprehensive income concept needs to be improved. Third, the disclosure (definedandadjustedin2009) of comprehensive income and other comprehensive income cannot enhance the value relevance of comprehensive income, and also affect on investors to accurately understand the other comprehensive income. Based on the analysis of the empirical results, with the current capital market development stage and status, This paper provide suggestions that how to further improve the disclosure of comprehensive income and other comprehensive income, on the current capital market environment, in order to enhance investors’understanding about other comprehensive, reinforce the usefulness of financial information based decision-making, better service to our country’s capital market development.