Gary Biddle
Hong Kong University of Science and Technology
Jong-Hag Choi
Hong Kong University of Science and Technology
Abstract: The comprehensiveness of income, a key definition in accounting, remains contentious despite decades of debate. Financial Accounting Standards Board Statement 130 mandated comprehensive income disclosures in 1997, but research evidence on its usefulness is mixed. The International Accounting Standards Board is presently considering the question. A review of this debate reveals that investors have traditionally argued for more comprehensive definitions of income, whereas managers have traditionally argued for less comprehensive measures. This contrast between investor and management interests suggests a hypothesis addressed in this study: that different definitions of income are more ‘decision useful’ in different applications. We test this hypothesis by comparing for a common set of firm-years which of sixteen definitions of income dominate in three applications: information content, predictive ability, and executive compensation contracting. We compare performance for both income definitions and component sets. Our results reveal that among income definitions, comprehensive income defined by Statement 130 (NI130) dominates both traditional net income (NI) and fully comprehensive income (NIbroad) in explaining equity returns, but NI dominates both NI130 and NIbroad in explaining chief executive compensation. In predictive ability, no definition dominates clearly. However, among component sets, NIbroad dominates NI in all three applications, and NI130 in information content and compensation contracting, lending support to the disclosure of comprehensive income components. Thus, our findings indicate that different definitions of income are more decision useful in different applications and that comprehensive income component disclosures are useful.
Back to Program
