Usefulness of OCI

Is Comprehensive Income Useful?
Gary C. B i d d l e a * and Jong-Hag C h o i a , b *

Hong Kong University of Science & Technology
Seoul National University
Received November 2004; Accepted March 2006
Abstract
With the lnternational Accounting Standards Board (IASB) now considering the question, we
examine 16 different definitions of income across three applications: information content, predictive
ability and executive compensation contracting. Our results reveal that comprehensive income defined
by FASB Statement 130 (NIIJ dominates both traditional net income (NI) and fully comprehensive
in explaining
income (NIb,,,,d)in explaining equity returns, but that NI dominates NI,,, and Nlh,odd
executive compensation. These findings are strikingly consistent with prior lobbying positions. In
predictive ability, no definition clearly dominates. When income co,npunent.y are considered, NIbnrad
dominates in all three applications, thus lending support to the disclosure of comprehensive income
components.
J E L Classifications: M41, G12, G31

Keywords: comprehensive income, information content, executive compensation, predictive ability
*We gratefully acknowledge comments received from participants at the Columbia University Burton
Workshop, the American Accounting Association Annual Meetings, and Summer Symposium on Accounting
Research, Hong Kong University of Science & Technology, especiaily Chul Park and Michelle Yetman. Fenny
Cheng provided expert research assistance. Both authors gratefully acknowledge financial support from the
Research Grants Council of Hong Kong. The second author gratefully acknowledges the financial support from
the Institute of Management Research at the College of Business Administration of Seoul National University.
Gary C. Biddle and Jong-Hag Choi

Journal of Contemporary Accounting & Economics Vol2, N o 1 (June 2006) 1-32
1. Introduction
The International Accounting Standards Board is presently considering a proposal for
firms to report fully comprehensive income. This study provides evidence on the usefulness
of comprehensive income in three applications: information content, predictive ability
and executive compensation contracting. We use data from the US, where a comprehensive
income requirement was introduced in 1997. Following lengthy deliberation and by a
split vote, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income, requiring
the disclosure of both net income and a more comprehensive measure of income (NI13,)
for fiscal years beginning after December 15, 1997. SFAS 130 NI,,, includes four items
recorded as owners equity under previous FASB pronouncements: adjustments to
unrealized gains and losses on available-for-sale marketabIe securities (SFAS I 15),foreign
currency translation adjustments (SFAS 5 2 ) , minimum required pension liability
adjustments (SFAS 87) and changes in the market values of certain futures contracts
qualifying as hedges (SFAS 80).2
In perspective, these are only the latest rounds in a longstanding debate going back to
at least the 1930s. A review of this debate reveals that proponents of comprehensive
income have argued that a clean surplus that reflects only earnings and (nct) dividends is
internally consistent, less subject to manipulation and more in accordance with valuation
t h e ~ r yOpponents
.~
have argued that income should abstract from transitory effects to
reflect only current operating performance. Prominent among them are managers who
also have lobbied effectively to exclude from net income items over which they have
lesser control.
This contest between the all-inclusive (comprehensive) and current operating
performance views of income has also spawned considerable research, including several
recent studies that examine specifically the usefulness of SFAS 130disclosures. The evideence
is mixed. For example, Hirst and Hopkins (1998) find in a controlled behavioral laboratory
setting that the ability of analysts to estimate share values is enhanced by the disclosure of
comprehensive income component^.^ However, Dhaliwal et al. ( 1999) conclude that
comprehensive income is no more strongly associated with returndmarket value or better
predicts future cash flowshncome than net income. This, they argue, calls into question the
FASBs requirement for SFAS 130 comprehensive income disclosures. 0Hanlon and Pope
( 1999) similarly find little evidence of incremental information content for comprehensive
income items excluded from net income for a sample of UK companies.
I See International Accounting Standards Committee (I999). International Accounting Standards Board
(2002,2003).
NI,,,, however, is not fully comprehensive, as would be a measure that explains the change in owners
equity net of dividends (Nlh,,J -see Section 2 below.
See Brief and Peasnell (I996) and OHanlon and Pope (I999).
.I See, for example, Robinson (199 I). Association for Investment Management and Research (AIMR) (1993).
Sutton and Johnson (1993). American Institute of Certified Public Accountants (1994), Beresford et A. (1996),
Johnson et al. (1995) and Smith and Reither (1996).
Maines and McDaniel (2000) find similarly that nonprofessional investors utilize comprehensive income
measures acquired in an experimental lab setting. Hirst et al. (2001) report consistent results for bank analysts.

Jorirnal of Contemporary Accounting & Economics Vol2, No I (June 2006) 1-32
This divergence of views and evidence regarding an issue of such central importance
to accounting begs for explanation. In this study we propose that conceivably, both sides
of the all-inclusive versus current operating performance debate could be correct. How?
By positing that different definitions of income may be more decision usefulin different
applications. Such a proposition has been alluded to in previous studies and frameworks,6
but it has not heretofore been tested systematically. Its confirmation would help explain
the conflicting views and help inform ongoing deliberations regarding appropriate
comprehensive income disclosures.
We proceed by comparing the decision usefulness of alternate income definitions for
identical firm-years in three applications: information content, executive compensation
and prediction. We examine the performance of both income definitions (aggregated
earnings) and income component sets (disaggregated income components). Data are
obtained from SFAS 130 disclosures, which are attractive for several reasons. First, SFAS
130 disclosures allow 16 different definitions of income to be compared with ample data
availability. Second, SFAS 130 is described by the FASB as a first step in implementing
the concept of comprehensive income (FASB 1997, SFAS 130, para. 5, p. 2), with explicit
provision for future modifications that could benefit from research findings. Third, prior
research has reached differing conclusions regarding their usefulness.
Our findings for income de$nitions reveal that for information content, the definition
of comprehensive income adopted by the FASB in SFAS 130 dominates both net income
and fully comprehensive income. In fact, it is not beaten by any of 15 other definitions of
income examined. Thus, in terms of information content, the FASB appears to have chosen
wisely. For predictive ability, no income definition dominates clearly. For executive
compensation contracting, net income, rather than comprehensive income is most decision
relevant, consistent with the view of managers and prior contracting research (e.g.,
Holthausen and Watts, 2001). Thus, these results for income definitions reveal a pattern
strikingly consistent with the divergent views of investors and managers, in that
comprehensive income dominates for information content and net income for compensation
contracting.
Our findings for income component sets reveal that fully comprehensive income provides
the most decision usefulness for all three applications: information content, predictive ability
and executive compensation contracting (except for predicting future NI,,,, where NI,,, exhibits
Also, component sets provide
the largest R2, but is insignificantly different from Nlbroad).
generally greater decision usefulness than corresponding income definitions across
applications. These findings, when combined, support two primary conclusions: ( 1 ) different
definitions of income provide different decision usefulness in different applications; and (2)
it is decision useful to disclose separately comprehensive income components. These
conclusions lend support to the IASBs (2003) proposal fo require the disclosure of
comprehensive income and the view that different components of comprehensive income
are useful in different ways to users of the accounts (IASB 2002, lo).
For example, Holthausen and Watts (2001, 16) ask is a better summary measure of performance one that
more accurately measures permanent income, one that is more highly associated with value, or something
completely different (e.g., one that measures the effect of the managers actions on firm value for contracting
purposes)?
Journal
of Contemporary Accounting & Economics Vol2, N o I (June 2006)
1-32
The paper is organized as follows. Section 2 provides background on SFAS 130 and
previous research findings. Section 3 develops our approach and tests. Section 4 describes
the sample selection, variable measures and data characteristics. Section 5 presents our
empirical results. Section 6 provides a summary and discussion.
2. Comprehensive Income: Debate and Evidence

The longstanding debate between proponents and opponents of comprehensive income
is well documented in several previous studies, notably Kiger and Williams (l977),
Robinson (1 99 1) and Brief and Peasnell (1 996). Since at least the 1930s, advocates of
current operating performance have argued that decision makers are better served by
income insulated from external and transitory effects. These arguments have originated
from both valuation and contracting perspectives. Analysts and investor interests have
argued that nonrecurring items impair the forecasting of future cash flowsRManagers
have argued that they should not be held responsible for earnings components over which
they have little control, a reasoning fundamental in contracting theory (Holthausen and
Watts, 2001; Lambert, 2001). These arguments and associated lobbying have been
instrumental in the passage of several FASB and Accounting Standards Board (ASB)
standards that explicitly introduce dirty surplus items to balance sheet owners equity
and bypassing income. Notable among these are adjustments to unrealized gains and losses
on available-for-sale marketable securities (SFAS 12 and 115, effective 1975 and 1993,
respectively), foreign currency translation adjustments (SFAS 8 and 52, effective 1976
and 1982, respectively) and minimum required pension liability adjustments (SFAS 87,
effective 1986). In the UK, similarly, members of the ASB dissented from restrictions on
dirty surplus items introduced in Financial Reporting Standards (FRS) 7 and 10 (OHanlon
and Pope, 1999).
Proponents of comprehensive income have countered that dirty surplus items violate
the articulation of the income statement and balance sheet and allow managers to manipulate
earnings. Their arguments have also met with success as the FASB and its predecessor in
the US, the Accounting Principles Board (APB), have periodically swung toward more
comprehensive income measures. Examples include APB Opinion 9, effective lL966;
Statement of Financial Accounting Concepts 5, issued 1984; and most recently, SFAS
130, effective 1997. In the UK, examples of pronouncements restricting dirty surplus
items include FRS 3 (issued 1992), FRS 7 (issued 1994), FRS 10 (issued 1997) and FRS
15 (issued 1999). Tellingly, arguments for more comprehensive income measures have
originated primarily from the valuation (versus contracting) perspective. For example,
Paton (1934), May (1937) and Littleton (1940).

If we want to maximize the information about value in the earnings figure and minimize noise, we can
choose accounting rules that make earnings look more like value and less like change in value. In other words,
we can choose rules that minimize transitory components of earnings, while leaving the permanent components
(Black, 1993.5).
See Robinson (1991). AIMR (1993), Sutton and Johnson (1993), American Institute of Certified Public
Accountants (1994), Beresford et at. (1996), Johnson et al. (1995), Smith and Reither (1996) and American
Accounting Association Financial Accounting Standards Committee (Linsmeier et al., 1997a).
Journal
of

Contemporary Accounting & Economics Vol2, No I (June 2006) 1-32
the American Accounting Association Financial Accounting Standards Committee

(Linsmeier et al., 1997b) argued that an analysts forecast can be used to value a stock
only if it is a forecast of comprehensive income and a price/earnings ratio only has a
precise interpretation if the earnings are comprehensive ... For reported income to be most
useful in equity price valuation, it must be comprehensive. As noted by the FASB, the
report of the AIMR ( I 993) was particularly influential in motivating the SFAS 130
comprehensive income requirement (SFAS 130, para. 40, p. 16).OThe IASB is presently
working in conjunction with the ASB, which has had an active project on this issue since
2000, when it issued Financial Reporting Exposure Draft 22 advocating a comprehensive
measure of income.
From the US experience, two noteworthy features of SFAS 130 are the controversy
surrounding its passage and its work-in-process nature. As documented in SFAS 130 and
beyond the advance lobbying above, the FASB received 28 1 comment letters on the
Exposure Draft (ED) for SFAS 130 (issued June 1996) and 22 individuals and organizations
presented their views at public hearings in November 1996. The FASB further discussed
the ED with constituents, the Financial Instruments Task Force and the Financial
Accounting Advisory Council (SFAS 130, para. 50, p. 19). Despite this considerable
input, views among Board members remained split, leading to a 5-to-2 vote for passage.
The two dissenting Board members, Messrs. Cope and Foster, objected that SFAS 130
permits an enterprise to display the items of other comprehensive income [...I with less
prominence and to characterize them differently from other items of comprehensive income
that are currently included in net income (SFAS 130, p. 9).
The work-in-process nature of SFAS 130 is evidenced by its partial implementation of
SFAC 6. In SFAC 6 (issued 1984), the FASB had previously defined comprehensive income
as the change in equity [net assets] of a business enterprise during a period from the
transactions and other events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from investments by owners and
distributions to owners (SFAC 6, para. 70). In other words, the FASB had previously
defined comprehensive income as clean surplus income, to include all changes in owners
equity except (net) dividends. SFAS 130 goes only part way towards this definition by
retaining several dirty surplus items (detailed below) and provides specifically that future
accounting standards will provide guidance on items that are to be included in
comprehensive income and its components (SFAS 130, para. 7, p. 3).
SFAS 130 includes in its definition of comprehensive income four owners equity
adjustments explicitly excluded from net income in previous pronouncements: adjustments
to unrealized gains and losses on available-for-sale marketable securities (SFAS 1 15),
foreign currency translation adjustments (SFAS 52), minimum required pension liability
adjustments (SFAS 87) and changes in the market values of certain futures contracts
Also influential, as noted in SFAS 130 (para. 41-45), was a meeting of the FASB with the Accounting
Policy Committee of Robert Morris Associates (a credit rating agency now called Risk Management Association),
a similar comprehensive income requirement by the ASB (effective 1992) and a then pending comprehensive
income requirement by the International Accounting Standards Committee (International Accounting Standards
I , 1998, esp. para. 87-88, p. 34). See also Wahlen et al. (2000).
Gary C. Biddle and Jong-Hag C h i

Journal of Contemporary Accounting & Economics Vol2, No 1 (June 2006) 1-32
qualifying as hedges (SFAS 80). SFAS 130 omits from comprehensive income several
additional dirty surplus items, including gains or losses on foreign currency transactions
designated as and effective as, economic hedges of a net investment in a foreign entity
(SFAS 52); gains or losses on intercompany foreign currency transactions that are of a
long-term investment nature and accounted for using the equity method (SFAS 52); and
subsequent increases or decreases in the fair value of available-for-sale investment securities
previously written down as impaired (see Beresford et al., 1996, 70). Below we examine
empirically both comprehensive income as defined by SFAS 130 (NI,30) and a fully
comprehensive measure that includes all changes to owners equity except (net) dividends
(NIbroad).
Several recent studies have examined specifically the usefulness of SFAS 130
disclosures. Hirst and Hopkins (1998) find in a behavioral lab setting that disclosure of
the SFAS 130 marketable securities component helps buy-side equity analysts estimate
more accurately the stock price of a company that upwardly manages its net income using
the available-for-sale investment portfolio (see also discussants comments by Lipe (1998)).
A follow up study of bank analysts risk and value judgments reaches a similar conclusion
(Hirst et al., 2001). As Hirst and Hopkins (1998) correctly admit (p. 48), [a] strict
interpretation of the efficient markets hypothesis suggests that SFAS 130 constitutes a
simple reformatting of the financial statements (i.e., there are no new recognition or
measurement rules included in SFAS 130), [that] will have no effect on financial statement
users judgments (emphasis in the original). Nevertheless, they argue from a behavioral
perspective that analysts judgments will be affected by the clarity of disclosure of valuerelevant information.2 Consistent with this prediction, Ahn and Choi (2002) find using
Korean data that comprehensive income is incrementally value-relevant over net income.
Choi and Das (2003) find that analysts use information contained in comprehensive income
in updating their forecasts.
In contrast, Dhaliwal et al. (1999,43) conclude that, [wlith the exception of financial
firms, we find no evidence that comprehensive income is more strongly associated with
retumdmarket value or better predicts future cash flows/income than net income. Moreover,
the only component of comprehensive income that improves the association between income
and returns is the marketable securities adjustment. Our results do not support the claim
that comprehensive income is a better measure of firm performance than net incorr~e.~
OHanlon and Pope (1999,459) similarly find little evidence that other flows excluded
As explained below, our empirical measure of NI,,, (NIhruad)
also omits (includes) changes in the market
values of certain futures contracts qualifying as hedges (SFAS 80) due to coding limitations in the Cornpustat
database.
I 2 This argument, while plausible for individual decision makers, is problematic in markets where incentives
exist to detect and arbitrage reiated valuation effects, particularly where this component is observable at trivial
cost (by turning a page to the balance sheet). A more compelling behavioral rationale for decision usefulness
derives from the contracting perspective discussed below.
I 3 Even so, selected results in Dhaliwal et al. (1999) provide evidence of decision usefulness for information
content. Specifically, on page 52 it is reported that the adjusted R2 using NI,,, is larger than the adjusted R2
using net income and the difference [...I is significant at the 0.01 two-tailed level. On page 54 it is reported that
[tlhe adjusted R2 using [comprehensive income defined as net income plus the marketable securities component
of SFAS 1301 is larger than the adjusted R2 using net income and the difference I...] is significant at the 0.01 twotailed level. We augment these findings below.

Journal of Contemporary Accounting & Economics Vol2, No I (June 2006) 1-32
from ordinary profit are value-relevant for UK firms. Cahan et al. (2000) find no evidence
that [comprehensive income] items provide information that is incrementally relevant above
comprehensive income for New Zealand firms (see also discussants comments by
OHanlon (2000)).
Recent controversies regarding pro-forma earnings can likewise be viewed as part of
the larger debate regarding the comprehensiveness of income. Whereas managers have
claimed that the narrower pro forma earnings provide a better measure of operating results,
financial commentators and accounting regulators have countered that pro forma earnings
can misrepresent operating results. Once again, research evidence is mixed. For example,
Bradshaw and Sloan (2002) and Brown and Sivakumar (2003) find greater market reactions
around earnings announcements for pro-forma earnings than for net income. Lougee and
Marquardt (2002) and Johnson and Schwartz (2001) find no significant differences. Brown
and Sivakumar (2003) find pro-forma earnings more predictive whereas Doyle et al. (2002)
find with a different design that items excluded from pro-forma earnings are themselves
predictive. l 4
This continuing debate and conflicting evidence are in a sense surprising, in that they
relate to an issue as fundamental to accounting as the comprehensiveness of income. In
another sense, this debate is revealing. Over decades, investor and management interests
have consistently held to differing views. Investors have advocated income measures that
include all value-relevant components, with further distinction between permanent and
transitory effects. Managers have consistently advocated less inclusive measures that exclude
items over which they have lesser control. In this study we allow that these divergent
views may be justified. How? By allowing that different measures of income may be more
decision useful in different applications. Given the parties involved, three obvious
applications to examine are information content, predictive ability and executive
compensation contracting.
This notion that different measures of income should exhibit different decision
usefulness in different applications also has been alluded to in previous research. For
example, Holthausen and Watts (2001,48) assert that the nature of dirty surplus can be
explained by the existence of multiple roles for financial reporting. Gaver and Gaver
(1998, 252) express hope that research [...I could provide additional insights into the
process by which compensation is determined and the aspects in which the types of
accounting information useful for compensation contracting differ from the accounting
numbers used for valuation purposes. However, no study heretofore has directly addressed
this proposition. This study therefore offers the opportunity to assess whether compensation
committees consider adjustments between net income and comprehensive income to be
transitory components or noise that should not factor into management compensation. In
SFAS 130, the FASB created a natural experiment by identifying components that in
combination create 16 different measures of income that are here compared in terms of
decision usefulness.
To enhance comparability, we assess decision usefulness using similar firm-years. To
provide broader inferences, we further distinguish between income definitions and income
lJSee also Smith (2001) and Liesrnan and Weil (2001).

component sets. By income definition we refer to the number obtained by algebraically

summing all components of a given income measure. For example, net income equals the
sum of component revenues and expenses. Introducing a summary measure into a regression
model has the effect of constraining all of its components to have the same coefficient
value. Analyzing income component sets separately allows each component in a regression
model to have its own coefficient value and provides inferences regarding the decision
usefulness of their separate disclosures.
3. Approach and Tests

Following from the above, this study compares for a similar firm-year sample the
decision usefulness of alternative income definitions and component sets in three
applications: information content, executive compensation contracting and prediction of
future values of income and cash flows. These hypotheses (in alternate form) are:
Different definitions of income and /income component sets provide different decision
usefulness for:
H,: Information content (equity returns).

H,: Predicting future values of net income, operating income and operating cash flows.
H,: Compensation contracting.
Combined, these results address the question of whether different income measures are
more decision useful in different applications:
H,: More (less) comprehensive definitions of income are more decision useful for
explaining equity returns (compensation contracting).
Finally, there is the question of whether it is decision useful to disclose comprehensive
income components:
H,: It is decision useful to disclose comprehensive income components separately.

Relative association comparisons are used to address hypotheses H,, H, and H, (Biddle
H, is assessed by comparing the findings for H,, H, and H,.
Hypothesis H, is assessed by comparing results for income definitions and component
sets.15
et al., 1995). Hypothesis
As our focus is on the relative decision usefulness of income definitionkomponent sets, we do not report
results for tests of incremental information content of individual components (see also Biddle et al. (1995)),
except for Table 3 below.
Cavy C. Biddle and Jong-Hag Choi

Joiirnal of Contenzporary Accounting C? Economics Vol2, No I (June 2006) I-32
Testing HI: We test hypothesis H, by regressing equity returns (raw and excess above a
value-weighted market index) on the levels and lagged levels of different income definition/
component sets and conducting relative association comparisons. As detailed in Biddle et al.
( 1 993, this approach is econometrically equivalent to a levels and changes formulation,
but holds the advantage of allowing response coefficients to be observed directly. It further
endogenously incorporates income forecast errors based on autoregressive time-series
predictions.
Testing H,: We test hypothesis H, using relative association tests of the ability of different
income definitiodcomponent sets to explain future net income, operating income, operating
These measures are selected based on their use in previous
cash flows, NI,,, and NIbIUad.
studies of predictive ability (e.g., Dhaliwal et al., 1999; Brown and Sivakumar, 2003;
Doyal et al., 2002) and their appearance in valuation models. We examine both one-yearahead and two-year-ahead forecasts.
Testing H,: We test hypothesis H, using similar relative association tests of the ability of
different income definition/component sets to explain chief executive compensation.
Following the approach of Gaver and Gaver (1998) and Bushman et al. (2000), we focus
on salary and bonus compensation.Ih Excluding compensation components based explicitly
on share grants or changes in the values of owned shares or options reduces noise introduced
by other factors affecting share values and provides a sharper focus on alternative income
definitions that may be used in executive compensation contracting. Executive compensation
data are obtained from the ExecuComp database.I7
Testing H,: Hypothesis H, is assessed by comparing qualitatively the findings for H I , H,
and H,. It cannot be tested quantitatively using conventional association tests because it
involves comparisons of other tests that themselves employ different dependent variables.
A qualitative assessment is obtained by comparing rankings of relative decision usefulness
of the different income definition/component sets for information content, compensation
contracting and predictive ability, as informed by levels of statistical significance obtained
for each.
Testing H,: Hypothesis H, is also assessed by comparing qualitatively the findings for H , ,
H, and H,. Specifically, it is decision useful to disclose sets of income components rather
l6 As observed by Bushman et al. (2000, 1 I), [tlhe association between changes in cash compensation and
earnings is well documented in prior research (see Lambert and Larcker (1987) and Sloan (!993)), among others.
Gaver and Gaver (1998, 235) find that cash compensation is significantly positively related to above the line
earnings, as long as results are positive. Compensation is shielded from the effects of above the line losses.
Similarly, nonrecurring transactions that increase income flow through to compensation, but nonrecurring losses
do not. We employ similar partitions based on the signs of income components.
Previous studies that have considered associations between earnings components and executive
compensation include Clinch and Magliolo (1993) (earnings components of bank holding companies), Dechow
( 1994) (differential potential for manipulation), Natarajan ( 1996) (cash versus accrual components in optimal
contracting) and Baber et al. (1998) (persistent versus transitory components).
10

than only definitions if either association is enhanced or patterns of association differ in

any or all of the application settings examined. An assessment of statistical significance
can be provided within each application, with economic significance remaining judgmental.
4. Research Methodology
4.1 Sample selection
Examined in this study are firm-year observations with required Compustat and CRSP
(and later, ExecuComp) data from the period 1994-98. All 48,649 firm-year observations
from Compustat are originally retrieved. After deleting firm-years with missing earnings
components and share returns data, 23,427 firm-year observations remain: 4,232
observations from 1994,4,607 from 1995, 4,768 from 1996,4,931 from 1997 and 4,889
from 1998. Below we restrict our sample to about 18,700 observations that have available
future valuesI8 and 5,349 observations that have chief executive compensation data for the
analyses on compensation contracting.
We examine 16 definitions of income including net income (NI), fully comprehensive
and a11 combinations of SFAS 130 components in between. These latter
income (NIbioad)
combinations are compared within three groupings in which one, two, or all three SFAS
130 components (NJ3,J are added to NI. The three SFAS 130 components are: adjustments
for unrealized gains and losses on available-for-sale marketable securities (SEC), foreign
currency translations (FCT) and minimum required pension liabilities (PEN). We do not
examine separately the fourth SFAS 130 component, changes in the market values of
certain futures contracts qualifying as hedges, as it is not separately identified in Compustat.
Rather, we combine this SFAS 130 component with any other dirty surplus items (OTH)
that explain the difference between the SFAS 130 definition of comprehensive income and
Thus, NIbroad
= NI,,, + OTH = NI + SEC + FCT
the fully comprehensive measure (NIbmad).
+ PEN + OTH.
4.2 Variable measurement

Our income and returns variables are defined as in Dhaliwal et al. (1999), with only
slight differences in notation and the addition of abnormal returns. All variables except
equity returns and the future changes are scaled by beginning-of-period market value of
equity.
NI
Net income
Bottom line net income after extraordinary items and discontinued operations,
measured as Compustat data item #I 72.
The exact sample sizes for future value predictions are 18.7 14 for the prediction of future NI; 16,321 for
future operating cash flow; 18,679 for future operating income; 18,701 for future NI,30;and 18,322 for future
NIhroad.
We also performed analyses for the subset of data with all five future variables available. Because the
results are qualitatively similar, we do not separately report them.

SEC
FCT
PEN
NI,,,
NLad
OTH
CRR
CAR
I1
Adjustment for unrealized holding gains/losses on marketable securities

Measured as the change in Compustat data item #238.
Adjustment for foreign currency translation.
Measured as the change of Compustat data item #230.
Adjustment for pension liability
Measured as the change in additional minimum pension liability in excess of
unrecognized prior service costs (Compustat data item #297 - #298, if less than
zero).
Comprehensive income defined as SFAS 130
Measured as NI,3, = N1+ SEC + FCT + PEN.
Comprehensive income defined broadly
Fully comprehensive income measured as the change in retained earnings plus
common stock dividends (change in Compustat data item #36 + #21).
Other comprehensive income
Measured as OTH = NIbrond
- NII3".
Cumulative raw return
Equity returns (cum dividend) cumulated for 12 months, from eight months
prior through three months after the fiscal year end.
Cumulative abnormal return
Cumulative abnormal return measured as the difference raw equity return and
expected return, where expected return is estimated using the conventional market
model:
R,l= a
+ bR,I,l+
E,
where
RII= raw return to shares of firm i during time t
R,,,l= value-weighted market index return during time t
Parameters a and b are estimated by using 100 days' actual data ending one
year before the event year. s l is a random, mean-zero error term. Returns are
cumulated for 12 months, from eight months prior through three months after
the fiscal year end month (month 0). The Pearson (Spearman) correlation
between CAR and CRR for the extended sample is 0.9133 (0.8980).19
I y Because the results using CAR and CRR are not qualitatively different, we henceforth report only results
using CAR. We also measure the CAR and CRR variables by cumulating returns for 15 months (CAR2. CRR2),
starting from the beginning of year t (month -1 1) to three months after the end of the fiscal year (month +3) and
12 months (CARS, CRR3), from the beginning of the fiscal year (month -I 1) to the end of the fiscal year (month 0).
Because all the empirical results are qualitatively similar regardless of the measurement period, we do not report
the results based on these alternate returns measures. The Pearson correlation for the extended sample between
CRR and CRRZ is 0.8807, between CRR and CRR3 is 0.729 I and between CRRZ and CRR3 is 0.8588, all
significantly different from zero (p<O.OOI).The Pearson correlation between CAR and CAR2 is 0.8961, between
CAR and CAR3 is 0.75 10 and between CAR2 and CAR3 is 0.8617, all significantly different from zero (p<0.001).
The Pearson correlation between CRR and CAR is 0.9133, between CRR and CAR2 is 0.8949 and between
CRR3 and CAR3 is 0.9236, all significantly different from zero (p<O.OOI).
12

Journal of Conteniporary Accounting & Economics Vol2, N o I (June 2006) 1-32
CF
01
Operating cash flow

Measured as the level of cash flow per share scaled by the year t's beginning
stock price. (Compustat data item #123 + #125).
Operating iricome
Measured as the level of operating income per share scaled by the year t's
beginning stock price. (Compustat data item #178).
Chief executive compensation is measured as salary plus bonus, excluding shares and
share options granted or owned. This follows the approach of Gaver and Gaver (1998)
and Bushman et al. (2000) and the reasoning that: (1) cash compensation constitutes a
material portion of executive compensation (Lambert and Larcker, 1987); (2) bonus plans
typically make reference to earnings measures (Gaver and Gaver, 1998); and (3) cash
compensation is likely to be more closely related to accounting measures compared with
other forms of compensation (Sloan, 1993). Thus, cash compensation is likely to be more
revealing of the utilization of alternative earnings measures in compensation contracting.
COMP
Executive cash compensation

Total cash compensation (cash salary plus cash bonus) of the chief executive officer
from the ExecuComp database and following Gaver and Gaver (1998). scaled by
equity value at the beginning of the fiscal year and multiplied by 1,000.
4.3 Data characteristics

In Table 1, Panel A, we report Pearson and Spearman rank correlations among NI,
NI,,, and NIbroad.2"
The Pearson (Spearman) correlation between NI and NI,,, is 0.9979
0.6884 (0.8750); and between NI,,, and NIbrond,
0.6898
(0.9542); between NI and NIbrond,
(0.9 152). These correlations are all highly significant (p<O.OO 1). Variable distribulions
are described in Panel B of Table 1. Noticeable is the preponderance of zero values for the
SFAS 130 components. The resulting close correspondence between NI, NI, 1o and PJIbrOad
is evident in their similar mean values and high correlations noted in Panel A. It might
also be noted that observations for PEN are strictly negative, as it refers to the recognition
of minimum pension liability. Generally, the means of future observations of NI,+,,NI13,,,,+,
and N L d , t+l are greater than the means of NI, NI,,, and NIhroad.
This is because a few
extreme observations having very small values in year t do not appear in year t+l, possibly
due to the bankruptcy or acquisition of the company. There is little difference in median
values among them.
2o We also calculated complete correlations and distributions for the 5,349 firin-year observations with
compensation data. Because the results are qualitatively similar, we do not report them separately.

Journal of Contenzporary Accounting & Economics Vol2, No I (June 2006) 1-32
13
Table 1
Descriptive Statistics
Panel A: Pearson (Spearman) correlations among the three primary income measures
N1
'Ib
0.9979 (0.9542)
NI,,,
NIhrood 0.6884 (0.8750) 0.6898 (0.9152)
Panel B: Variable distribictiorts
Variable
Mean
Variance
1%
50 %
25 70
75 %
99 %
-0.0533
0.6822
-1.6214
-0.0052
0.0467
0.0745
0.2493
-0.0539
0.6819
- 1.7124
-0.0090
'0.0454
0.0742
0.2830
-0.05 I5
0.9677
- 1.6355
-0.0090
0.04 10
0.0724
0.3232
0.000 I
0.0024
-0.0777
0.0786
-0.0004
0.0004
-0.0275
0.02 I5
-0.0004
0.0001
-0.0052
0.0024
0.53 13
-0.2097
-0.0013
0. I296
0.0085
0.4064
-0.8525
-0.324 I
-0.0569
0.2082
2.1214
0.0173
0. I930
-0.9584
-0.006I
010621
0.1081
0.4834
0.0995
0. I238
-0.6754
0.01 19
0.0939
0.1810
0.9934
0.1287
0. I067
-0.5987
0.0320
O.Il220
0.2149
0.9742
0.0278
0.0932
-0.88I7
-0.007 1
0.0589
0.1084
0.5255
0.0 I32
0.3693
- I .0208
-0.0213
0.0532
0.1063
0.5852
1.3693
8.5789
0.0279
0.3282
0.7697
1.6306
9.6790
Correlation significance levels not reported since all differ significantly from zero (p<O.O01).
Distributions for NI through CAR are calculated by using 23,427 observations; for NI,+,,CF,+,,01,+1,
NI130,,+,,
NIhr,,ad,,+,,
approximately 18,700 observations; and COMP 5,349 observations.
NI
NI,,,
NIhrc,d
SEC
FCT
PEN
OTH
CAR
= net income (where all variables are scaled by beginning of fiscal year equity value)
= comprehensive income defined by SFAS 130 = NI + SEC + FCT + PEN
= fully comprehensive income = NI + SEC + FCT + PEN + OTH
= change in the balance of unrealized gains and losses on marketable securities
= change in the cuinulatjve foreign currency translation adjustment
= change in additional minimum pension liability in excess of unrecognized prior service cost
= other components of Comprehensive income that belong to NIb,t,adbut not to NI,,,,
=cumulative abnormal return measured for 12 months, from month -8 to month +3
= future net income (NI) at year t c l
NI,+,
CF,+, =future cash flow at year t+l
OIf+, = future operating income at year t+l
NIl,o,,+l =future comprehensive income defined by SFAS 130 (NI13,Jat year t+l
NIbrtud,t+l
= future fully comprehensive income (NIhr<,.Jat year t+l
COMP = executive cash compensation
14

5. Empirical Results
5.1 Information content (H,)

We test hypothesis H I by examining the relative information content of 16 definitions
of income that are available in SFAS 130 disclosures. We employ the following regression
model:
CAR, = a +b, I,
+ Added Component(s),] + b, I,., + Added Component(s),., It- E ,
(2)
where Added Components are SEC, FCT, PEN and OTH; a, b, and b, are estimated
regression coefficients, E , is a random, mean-zero error term, time subscripts are omitted
for expositional clarity; and the quantities in square brackets create (levels and lagged
levels of) different definitions of income. The R2 from this equation is used to determine
whether an income definition is better (or worse) in explaining contemporaneous stock
returns than another when compared using an association test.
To compare the decision usefulness of income component sets, we also estimate a
separate regression that allows the coefficients on each component to differ (where terms
are as defined above):21
CAR, = a +b,NI, + b, NI,., + biAdded Component(s), + bj Added Component(sj,-,+
E,
(3)
The empirical results using equations (2) and (3) are reported in Panels A and 3 of
Table 2, respectively.22Each cell in the second column of Table 2 shows adjusted R2 when
the added components are those in the first column. We perform statistical tests to compare
these R2 against four benchmarks. The first comparison is against NI, with the corresponding
value of the Biddle et al. (1995) (hereafter BSS) Wald statistic reported in the third column
of the table.23The second comparison is against NI,,,, with the corresponding BSS statistic
with the
reported in the fourth column of the table. The third comparison is against NIbroad,
corresponding BSS statistic reported in the fifth column of the table. The last comparison
is against the income definition that provides the largest adjusted R2 among models having
the same number of added components. The resulting BSS Wald statistic is reported in the
rightmost column of the table.24 In the table, even though the BSS test is non-directional,
we add a + or - sign to help the readers understand the results more easily. For example,
2 1 It is reasonable to conduct these tests using data prior to the effective date of SFAS 130, since these
components were required disclosures under prior FASB pronouncements (listed above).
22 The empirical analyses are performed after removing outliers having an absolute value of the standardized
error greater than 3. Thus, the sample size of each regression is slightly smaller than 23,427. Using different
cutoff values (2, 2.5,3.5 and 4 standard errors) does not qualitatively affect the results. In addition, all the results
are corrected for the heteroskedasticity by using Whites (1980) method.
23 The distribution of BSS statistic is approximately 9.
24 We also performed Vuong (1989) tests to examine the R*differences among models. Results are qualitatively
similar.

Journal of Conteniporary Accounting C? Economics Vol2, No 1 (June 2006) 1-32
15
Table 2
Relative Information Content of Alternative Earnings Measures (H,)
CAR,= a
CAR, = a
+ b, I, + Added Component(s)l] + b, I,., + Added Cornponent(s),.,]+ E ,

+ b, NI, + b,NI,., + b, Added Component(s),+ bjAdded Component(s),,+ E ,
Panel A: Analyses with income dejinition (equation 2)
Biddle et al. (1995) Wald statistics for the comnarison against:

NIbrwd
Best model with
(Adj. R2
NI
(Adj. R2
NI,,
(Adj. R2
the same number
= 0.0304)
= 0.0253) of added components
Added Component(s)
Adj. R
=0.0296)
None (=NU
0.0296
NA
SEC
0.0303
1 1.24***
FCT
0.0296
PEN
0.0297
OTH
0.0246
SEC, FCT
0.0303
8.50***
SEC, PEN
0.0304
12.26***
SEC, OTH
0.0252
-2.00
-5.28**
-2.85*
-6.35**
FCT, PEN
0.0297
0.13
- 1 1.21***
1.82
- 10.44***
0.05
-9.54***
1.84
NA
-0.10
5.82**
NA
-12.22***
1.60
-10.44***
15.29***
-8.48***
2.08
-10.38***
-5.94**
-9.19***
-13.66***
- 15.00***
5.16**
-0.67
6.26**
NA
-0.07
-10.41***
FCT, OTH
0.0247
-6.25**
- 1 0.29***
-12.06***
- 1 1.33***
PEN, OTH
0.0247
-5.50**
-8.80***
-12.58***
- 1 0.39***
SEC, FCT, PEN
0.0304
9.54***
NA
5.56**
NA
( = NI,30)
SEC, FCT, OTH
0.0253
-2.10
-5.96**
5.59**
-5.96**
SEC, PEN, OTH
0.0253
- I .75
-4.92**
0.83
-4.92***
FCT, PEN, OTH
0.0247
-5.79**
-9.86***
0.0253
-1.84
-5.56**
SEC, FCT, PEN, OTH

( = NLad )
- 1,1.13***
NA
-9.86***
NA
16

Table 2 (Cont.)
Panel B: Analyses with income components (equation 3 )

Biddle et al. 11995) Wald statistics for comDarison against:
NI
NL"
(Adj. Rz
(Adj. R'
(Adj. R'
the same number
= 0.0316)
= 0.0335)
of added components
Added Component(s)
Adj. R'
=0.0296)
None (=NI)
0.0296
NA
NIbcad
Best model with
-5.62**
-15.51***
NA
SEC
0.0298
0.24
-5.44**
-15.32***
-4.15**
FCT
0.0305
0.05
-5.12**
-1 0.55***
-0.12
PEN
0.0298
0.35
-5.25**
- 1 4.48***
-4.08**
OTH
0.0305
4.04**
-S.lO**
-10.39***
NA
SEC, FCT
0.03 I5
5.49**
-0.42
-7.9 I ***
-1.84
SEC, PEN
0.0296
0.41
-5.12**
SEC, OTH
0.03 17
5.91***
FCT, PEN
0.0306
4.1 1 **
FCT, OTH
0.0322
7.24***
2.51
-5.94**
NA
PEN, OTH
0.0307
4.93**
-4.52**
-9.52***
-4.49**
0.03 I6
5.62**
NA
-7.67***
-5.99**
SEC, FCT, OTH
0.0333
10.92***
8.79***
SEC, PEN, OTH
0.03 I9
I1.25***
0.92
FCT. PEN. OTH
0.0324
4.95**
1.86
-4.79
-1.81
0.0335
15.51***
7.67***
NA
NA
SEC, FCT, PEN
0.28
-4.98**
-14,89***
-6.62***
-6.82**
-0.84
-9.87***
-5.46**
( = NI,,, )
SEC, FCT, PEN, OTH
-5.n8**
-10.45***
NA
-5.92**
( = NI,,,,, )
Adjusted R2 statistics for returns-earnings equations (2) and (3). The dependent variable is CAR. The predictors
are the levels and the lagged levels of alternative income definitions defined by progressively adding one, two,
three or all four comprehensive income components to net income (NI). The analyses are performed after removing
outliers with absolute values of standardized errors greater than three. The adjusted R? of each model is compared
with those of four benchmark models, with the values of Biddle et al. (1995) statistics reported in the corresponding
rowskolumns. The second column reports the adjusted R2of each regression model. The Biddle et al. (1995)
statistics reported in the third column is a comparison against NI, the statistic in the fourth column is a comparison
against NI,,,, the statistic in the fifth column is a comparison against NI,,, and the statistic in the rightmost
column is a comparison against the model with the largest adjusted R2 among the grouped models with equal
numbers of added components. The symbol '***' (**, *) represents that the result is significant at the I (5, 10)
percent level. Variables are as defined in Table 1 .

Joirnial of CoriteinporaryAccounting & Economics Vol2, No I (June 2006) 1-32
17
when we compare the model where none of the other components are added to the NI, the
R2 is 0.0296 and it is significantly smaller than that of the NI,,, model (0.0304) as indicated
by the BSS statistic of -9.54 in the fourth column of Panel A of Table 2.
The results in Panel A of Table 2 reveal that: ( I ) contrary to the conclusion of Dhaliwal
et al. (1999), the definition of comprehensive income chosen by the FASB in SFAS 130
(NI,,) exhibits greater information content for equity returns than NI and NIbrna,;and (2)
NI and NIblOd,
are indistinguishable (at conventional levels of statistical significance).
Among income definitions that add one SFAS 130 component to NI, the results in
Table 2 reveal that: (3) the addition of SEC provides the greatest information content
(statistically significant at conventional levels against FCT, PEN and OTH), consistent
with Dhaliwal et al. (1999); (4) the addition of SEC to NI also provides an income definition
with information content greater than NI and NIbroad
but not NI,,,, also consistent with
Dhaliwal et al. ( 1 999); (5) the addition of FCT, PEN, or OTH to NI yields information
content smaller than NI,,,, (all significant at conventional levels); and (6) the addition of
(significant at conventional levels).
OTH to NI yields information content smaller than NIblndd
Among income definitions that add two SFAS 130 components to NI, Table 2 reveals
that: (7) the additions of SEC and PEN provides the greatest information content (statistically
significant at conventional levels above all the other combinations, except for the additions
of SEC and FCT, against which it is indistinguishable); (8) the additions of SEC and FCT
and SEC and PEN, provide income definitions with information content greater than N1
and Nlhrmd
(significant at conventional levels); (9) Except the addition of SEC and PEN, all
the other combinations yield information content smaller than NI,,, (all significant at
conventional levels); (lo) the additions of SEC and OTH, FCT and OTH and PEN and
OTH, yield information content smaller than NIbroJd
Among income definitions that add three SFAS 130 components to NI, Table 2 reveals
that: (1 1) the addition of SEC, FCT and PEN = NI,,, provides the greatest information
content than all other combinations (all significant at conventional levels); (1 2) the addition
of SEC, FCT and OTH is better than NIbro, but indistinguishable from NI; (13) the addition
of SEC, PEN and OTH is indistinguishable from both NI and NIbro,; (14) the addition of
FCT, PEN and OTH yields an income definition with information content smaller than
both NI and NIbroad
Considered together, the findings in Panel A of Table 2 reveal in one view the information
contents of all definitions of income available from SFAS 130 disclosures. They suggest
that based on information content, the FASB chose its definition wisely.Among 16 different
definitions of income, NI,,, wins. Additional industry-by-industry analyses (not reported)
show that NI,,, also wins in information content for three industry groupings of financial,
manufacturing and other firms.25
2s While i t may be observed that adjusted Rs i n Table 2 are small, they are comparable to those observed in
other related studies (e.g., Brown and Sivakumar, 2003) for pooled samples. When analyses are performed
industry-by-industry and year-by-year, adjusted Rs increase dramatically. For example, the average R? of NI,,,
in industry-by-industry and year-by-year analyses (total 15 combinations = three industries x five years) is 0.
05 I3 (and 0.0599 for CRR). If we remove additional outliers, adjusted Rs also increase; for example, removing
observations with absolute values of standardized errors greater than 2 (versus 3) increases the adjusted R for
NI,,, for the pooled sample to 0.0465 (from 0.0304). Results are otherwise qualitatively similar.
18

Panel B of Table 2 reports adjusted R2s when we allow each component to have its own
coefficient using equation (3). The results reveal that: (1) contrary to the findings based
on income definitions above, fully comprehensive income Nlbn,ad
now exhibits greater
information content thanboth NI and NII3,; and (2) NI,,, again dominates NI. Thus, the
separate consideration of comprehensive income components yields inferences that differ
from their combined definitions.
Among income component sets that add one SFAS I30 component to NI, the results in
Table 2 reveal that: (3) the addition of OTH provides the greatest information content
(statistically significant at conventional levels against SEC and PEN); (4) the addition of
(5) the
any one component to NI yields information content smaller than NI,,, and NIbrDBd;
addition of FCT or OTH to NI yields information content greater than NI. Thus, these
findings also differ from the definitional setting (equation (2)), where SEC added the most
explanatory power.
Among income component sets that add two SFAS 130 components to NI, Table 2
reveals that: (6) the additions of FCT and OTH provides the greatest information content
(statistically significant at conventional levels above the additions of SEC and PEN, FCT
and PEN and PEN and OTH); (7) all the combinations of the components provide
information content greater than NI except the addition of SEC and PEN; (8) the addition
of SEC and PEN, FCT and PEN and PEN and OTH yields information content smaller
than NI,,,; (9) all the combinations of the components provide information content smaller
than NIhroad
Among income component sets that add three SFAS 130 components to NI, Table 2
reveals that: (10) the addition of SEC, FCT and OTH provides greater information content
than other combinations (significant at conventional levels except against FCT, PEN and
OTH); ( 1 1 ) all the combinations provide higher information content than NI; (12) the
addition of SEC, PEN and OTH and FCT, PEN and OTH are indistinguishable from NI,,,
and (1 3) the adjusted RZsare generally larger for income component
but worse than NIbrosd;
sets than for corresponding income definitions ( 13 of 15 cases).
Taken together, the results reported in Table 2 suggest that the FASB chose wisely its
definition of comprehensive income in SFAS 130. Among 16 definitions of income, NI,,,
exhibits the greatest information content. However, when income component sets are
considered, the rankings change, with fully comprehensive income exhibiting the greatest
information content and other rankings also changing. This divergence of findings for
income definitions versus component sets and the generally larger adjusted R2s for income
component sets, lend support to hypothesis H, and to the decision usefulness of disclosing
income components.26
To provide additional insights, Table 3 presents full results for equation (3) applied to
net income (NI) and to the components of fully comprehensive income, NIbroad,for the
pooled sample and for industry subsamples. Table 3 also compares the adjusted R2sobtained
26 We also perform the same tests after restricting our samples to those used in the predictive ability tests of
N1 (1 8,714 observations). When the income definitions are tested, the R of NI model is 0.0261, that of NI,,, is
0.0272 and that of NI,,, is 0.0241. When the income component sets are considered, the R* of the NI model is
0.0261, that of NI,,,, is 0.0298 and that of NIhrwd
is 0.0315. In summary, all the results are consistent with those
reported in Table 2.

Journal of Contenzporary Accounting & Economics Vol2, No I (June 2006) 1-32
19
from equation (3)with corresponding adjusted R2s obtained from equation (2)for NI only.
These are shown in the rightmost column by the percentage decrease of the sum of squared
error (SSE) for each regression and statistical significance of the change of the explanatory
power (F value). The results reveal that: ( I ) all income components exhibit incremental
information content significant at conventional levels across all samples;27( 2 ) adjusted
R2s increase significantly for component sets when compared with the corresponding NI
only model, especially for the financial industry, where the sum of squared error decreases
by 2.42%;28 and ( 3 ) adjusted R2s are larger for all the three industry subsamples than for
the pooled sample as evidenced by the significant F-statistics reported in the rightmost
column.29As this study focuses on comparing the decision usefulness of income definitions
and components for information content, predictive ability and executive compensation, it
does not consider in detail the valuation and contracting implications of individual
comprehensive income components. For an excellent survey of this literature, see Wahlen
et al. (2000).
5.2 Predictive ability (H,)

Hypothesis H, is tested by comparing the ability of different income definition/
component sets to predict future levels in five series: net income, operating cash flows,
operating income, NI,,, and fully comprehensive income. In this regard, our tests parallel
those of Brown and Sivakumar (2003),Dhaliwal et al. (1999) and Doyle et al. (2002). We
employ equations (4) and (5) for income definitionkomponent sets, respectively:
27 A recent study by Louis (2003) finds foreign currency translation adjustments to be negatively associated
with equity returns, inconsistent with the positive sign observed in Table 3. Additional year-by-year analyses
reveal that the positive sign of FCT in Table 3 for the pooled sample and manufacturing and other subsamples is
driven by 1997 data. For 1994 and 1995, results (not reported) show a negative and significant coefficient for
FCT for all samples. For 1996 and 1998, it is slightly positive but insignificant. Correspondingly, the lagged
FCT coefficient is only positive and significant in 1998, while all results prior to 1998 show negative signs
(among them, only 1994s is significant.) Thus, the lack of a negative significant coefficient for FCT for the
pooled sample and manufacturing and other subsamples and significant positive coefficient for lagged FCT
appear to be driven by 1997 data. It happens that 1997 contained a major financial crisis (which started from late
1996 and ended in 1998) that produced a dramatic strengthening of the US dollar. Among 202 non-zero
observations of FCT i n 1997, 182 are negative, consistent with sample firms suffering foreign currency translation
losses. Thus, a positive coefficient for FCT may reflect foreign currency losses impounded in the stock prices of
US firms. Financial firms may have been less affected due to hedging activities or lower net foreign investments.
*Alternatively,the adjusted RZincrease by 54.3% from 0.029 I to 0.0449 for the financial industry subsample.
2y Dhaliwal et al. (1999) do not examine incremental information content directly, but their relative comparisons
for income definitions that add one component to NI suggest incremental information content for SEC for financial
firms only. OHanlon and Pope (1999) do examine incremental information content, finding no evidence for the
comprehensive income components of UK firms. The results in Table 3 reveal incremental information content
for all components for all samples. One explanation for the different results is that Dhaliwal et al. (1999) and
OHanlon and Pope (1999) examine different time periods and smaller samples ( I 1,425 and 3,160, respectively,
versus the 23,427 firm years used in this study).
0.01 80
0.1235
0.0078
-0.1089
0.0909
0.0562
0.9788
-0.3603
(3.77***) (.79)
0.4067
(4.29***) (1.23)
0.3396
b,
0.0787
0,0010
(-12.86***) (5.28***) (0.07)
-0.0618
0.1908
(4.30***) (0.60)
0.2379
(-10.98***) (9.47***) (-2.89***) (3.12***)(-0.73)
0.3154
(1.81*)
(14.79***) (5.81***)
-0.0544
0.0705
0.1365
0.0818
(-9.20***) (8.21***) (0.44)
-0,0268
b,
SEC
b,
0.7702
PEN
-1.7667
-0.7965
(-0.09)
3.3098
(2.56**) (1.42)
0.5259
0.8785
-0.1058
(-0.71)
-0.9263
1.5057
(4.23***) (4.96***) (-0.45)
0.8927
( I .81*)
-0.0235
0.0623
0.0074
-0.0223 8,643 0.0271

(2.77***)(-0.87)
0.0120
0.0487 9,295 0.0508

(0.98)
0.0702
5,198 0.0449
(1.62)
(2.58***) (-2.28**) (9.89***) (1.57)
6.9420
Adj.R*
23,139 0.0296
0.0068 23,139 0.0335
b,,,
(3.29***) (1.15)
0.0337
b,
E,
OTH
-0.1678
b"
(4.12***) (5.07***) (-0.53)
1.0419
b6
(-2.29**) (-1.30)
-2.5478
(0.15)
0.0356
b5
FCT
+ b,FCT, +b,FCT~.,+b,PEN,+b,PEN,,+b,OTH, + b,,OTH,.,+
(3.31***)
0.31 %
(4.60***)
0.40 %
(15.77""")
2.42 %
(16.00***)
0.55 %
NA
% SSE
decrease
(F value)
(3)
Incremental information content for comprehensive income components from equation (3). The dependent variable is CAR. The predictors are the levels and the lagged
levels of comprehensive income components. The analyses are performed after removing outliers with absolute values of standardized errors greater than 3. All results are
heteroskedasticity corrected using White's (1980) method. Reported are predictor estimates and associated t-statistics against a null of zero. The relative decrease of the sum
of squared error (SSE) for the regression model versus the corresponding sample using equation (2) for NI only is shown i n the rightmost column, with F statistics
reported below each i n parentheaes. The symbol '***' (**, *) represents that the result is significant at the 1 (5, 10) percent level. Variables are as defined in
Table I .
Others
turing
Manufac-
Financial
Total
0. I 137
-0.0279
Total
b2
b,SEC,.,
(-9.67***) (8.30***) (1.17)
b,
Constant
NI
+ b2NIr.,+ b,SEC,+
Sample
CAR, = a+b,Nl,
Incremental Information Content of Comprehensive Income Components
Table 3

Future value = a + b, [NIl +Added Component(s),] + b, [NZ,.,+

Added Component(s),-,]+ E,
Future value = a + b, NI, + b, NI,., + bjAdded Component(s), +
bjAdded Component(s),-, + s1
21
(4)
(5)
where Future value = {NIt+l,CFl+,,Oil+,, N1130,1+1,

NIbroad,t+l)
and terms are as defined in
Table 1. Selected results from the 16 different income measures are shown in Table 4.
The adjusted R2 of each model in Table 4 is compared with those of the other models, with
the values of Biddle et al. (1995) statistics reported in parentheses.The leftmost statistic in
parenthesis is a comparison against NI, the second statistic is a comparison against NI,,,
and the rightmost statistic is a comparison against NIbruad.
Table 4
Relative Decision Relevance of Alternative Earnings Measures for Future Prediction (H,)
Future value = a
Future value = a
+ b, IN/, +Added Component(s),l +b, "I,., +Added Cornponent(s),.,]+
Panel A: Dependent variable = Future net income (NI)
Added Component(s)
Definition (equation 4)
Components (equation 5)
NONE ( = NI)
0.0998
(NA, 4.00**, -10.48***)
0.0998
(NA, -1.04, -2.94*)
SEC, FCT, PEN
0.0961
0.1006
(-4.00**,NA,-9.25***)
(1.04,NA,-1.94)
SEC, FCT, PEN, OTH
0.1039
0.1261
( = NIhmdd
)
(10.48***, 9.25***, NA)
(2.94*, 1.94, NA)
( = NI,,,
Panel B: Dependent variable = Future operating cash jlow (CF)
Added Component(s)
NONE ( = NI)
0.0354
0.0354
(NA, 0.93,6.80***)
(NA, -6.62**, -6.93***)
SEC, FCT, PEN
0.0347
0.0389
( = NI,,,)
(-0.93, NA, 6.20**)
(-6.62**, NA, -0.48)
SEC, FCT, PEN, OTH
0.0257
(-6.80***, -6.20**, NA)
0.0398
(-6.93***, -0.48, NA)
( = "hmd
s,
+ b,N/, + b,NI,., + bfAdded Component(s), +b, Added Component(s),., +
B,
(4)
(5)
22

Table 4 (Cont.)
Panel C: Dependent variable = Future operating income (01)
Added Component(s)
NONE ( = NI)
0.0668
0.0668
(NA, -0.98, -0.20)
(NA, -2.74*, -5.67**)
SEC, FCT, PEN
0.0679
0.0707
( = NI,," )
(0.098, NA, -0.08)
(2.74". NA, -3.17*)
SEC, FCT, PEN, OTH
0.0845
0.0922
( = NIhmd)
(0.20, 0.08, NA)
(5.67**, 3.17*, NA)
Panel D: Dependent variable = Future comprehensive income (NI, TJ

Added Component(s)
Components (equation 5 )
NONE ( = NI)
0.0997
0.0997
(NA, -16.15***, -6.05**)
(NA, -28.68***, -14.74***)
SEC, FCT, PEN
0.1551
0.1564
( = NI,," )
(16.15***, NA, 11.09***)
(28.68***, NA, 1.00)
SEC, FCT, PEN, OTH
0.1242
0. I320
( = N L & J)
(6.05**, - 1 1.09***, NA)
(14.74***, -1.00, NA)
Panel E: Dependent variable = Future fully comprehensive income (NIb,,,J

Added Component(s)
NONE ( = NI)
0.0457
0.0457
(NA, -0.01, -5.07**)
(NA, -2.95*, -37.54***)
SEC, FCT, PEN
0.0465
0.0485
( = NI,,, )
(0.01, NA, -5.31**)
(2.95*, NA, -50.84***)
SEC, FCT, PEN, OTH
0.0519
0.0557
(5.07**, 5.31**, NA)
(37.54***, 50.84***, NA)
(=
"broad )
Adjusted R2 statistics for future prediction equations (4) and (5). The dependent variable is either future net
income (N1: Panel A), futurecash flow (CF: Panel B), future operating income (01: Panel C), future Comprehensive
income defined by SFAS 130 (Nl,,": Panel D) and future fully comprehensive income (NIhrodd:
Panel E) The
predictors are the levels and the lagged levels of alternative income definitions defined by progressively adding
three (NIlso)or all four (NIhrodd)
comprehensive income components to net income (NI). The analyses are performed
after removing outliers with absolute values of standardized errors greater than 3. The adjusted R2 of each model
is compared with those of the other models, with the values of Biddle et al. (1995) statistics reported in parentheses.
The leftmost statistic is a comparison against NI, the second statistic is a comparison against Nl,,, and the
Variables are as defined in Table I .
rightmost statistic is a comparison against NIhruud.

Journal of Contenzporaty Accounting C? Economics Vol2, No 1 (June 2006) 1-32
23
Results for income dejnifionequation (4) are reported in the second column of Table 4.
The results for predicting future N1 reported in Panel A reveal that: (1) NI model provides
the greater predictive ability than NI,,,; ( 2 ) NIbroadprovides the greatest predictive ability
among the three. The results for predicting future operating cash flow are reported in
Panel B. The results reveal that: (3)There is no statistically significant difference between
NI and NI,,,; (4) Both NI and NI,,, provide greater predictive ability than NIbroad.
This
differs from the results in Dhaliwal et al. (1 999), where NI dominates both NI,,,, and NIbmJd.
The results for predicting future operating income are reported in Panel C. The results
reveal that: (5) There exist no statistically significant differences among the three definitions.
The results for predicting future NI,,, are reported in Panel D. The results reveal that: (6)
NI,,, provides the greatest predictive ability among the three definitions; (7) NIbroad
provides
a greater predictive ability than NI. The results for predicting future NIbroadare reported in
Panel E. The results reveal that: (8) There exist no statistically significant differences
between NI and NI,,"; (9) NIhroadprovides the greatest predictive ability among the three.
Considered altogether, the results which compare income definitions reported in the
provides the highest predictive ability for future
second row of Table 4 reveal that: NI,,
N1 and NIbroad;
NI,,, provides the highest predictive ability for future NI,,,; NI provides the
highest predictive ability for future operating cash flow; and there exists no dominant
measure for predicting future operating income. These findings indicate that no single
definition of income clearly dominates in predictive ability and that different measures are
superior for different predictions.
Results for income component sets using equation ( 5 ) are reported in the rightmost
exhibits
column of Table 4. The results show that: (1) for all five future values, NIhrodd
larger explanatory power than NI,,,, which in turn exhibits larger explanatory power than
NI; ( 2 ) the sole exception being the prediction of NI,,,, where NI,,, exhibits the largest
(Panel E); (3) all
explanatory power but is indistinguishable statistically from NIbroad
differences are statistically significant except that the components of NI,,, d o not differ
for predicting NI (Panel A) and the components
significantly from those of NI and NIbroad
for predicting operating cash flow
of NI,,, do not differ significantly from those of NIbroad
(Panel B). Thus, the results in Table 4 for income component equation (5) showing that
NIbroad
usually dominates other measures in predictive ability and the differences in predictive
ability results between income definition equation (4) and income component equation
(3,both lend support to hypothesis H, and the decision usefulness of disclosing income
components.30*
3n We also examined separately predictive ability for year t+2, with qualitatively similar results for the
income components. However, for income definitions, the orderings are generally consistent with Table 4, but
few significant differences in predictive abilities are observed, consistent with the inherent difficulty of predicting
over longer forecast horizons.
3 ' Reported explanatory powers are relatively low because we report tests that use a pooled sample. When
we perform year-by-year tests, explanatory powers increase significantly. For example, the average Rz of NI,,,od
components in predicting NIbmad
using year-by-year data is 0.1989 compared with 0.0557 for pooled data in
Panel E of Table 4. In terms of RZorder, individual year results are qualitatively similar to those for the pooled
sample.
24

Journal of Contemporary Accounting & Economics Vol2, N o I (June 2006) 1-32
5.3 Executive cash compensation (H,)

We test hypothesis H, by examining the relative decision usefulness of 16 definitions
of income for explaining executive cash compensation. Following the approach of Gaver
and Gaver (1998), we separate observations by the sign of an income component. We also
continue to distinguish between income definitions (equation (6)) and component sets
(equation (7)):
COMP, = a +b, "1, + Added Component(~)~]+b,

(NEGIx [Nil +
Added Component(s),]) +b, "I,-, + Added Cornponent(s),-/]+
b, (NEG,, X "I,., +Added Component(s)l-,]i E,
COMP, = a +b, N l , + b, (NEG,x NI,) + b, NI,., + b, (NEG,., x NI,-/ ) +
biAdded Component(s)l + bj(NEGrx Added Component(s),) +
b, Added Component(s)l-,+b, (NEG,., x Added Component(s)r., )+
(6)
E~
(7)
where NEG = 1 if the associated variable is negative; and other terms are as defined in
Table 1. Empirical results are reported in Table 5. Panel A of the Table 5 reports the results
using income definitions (equation 6) and Panel B reports the results using income
components (equation 7).
Similar to Table 2 above, we present adjusted R2s with decision usefulness compared
with four benchmarks. The first comparison is against NI, with the corresponding value of
the BSS Wald statistic reported in the third column of the table. The second comparison is
against NI,,,, with the corresponding BSS statistic reported in the fourth column. The
third comparison is against NIbroad,
with the corresponding BSS statistic reported in the
fifth column. The last comparison is against the income definition that provides the largest
adjusted R2among models having the same number of added components. The resulting
BSS statistic is reported in the rightmost column of the table.
The results in Panel A of Table 5 for income definitions equation (6) reveal that: (1) in
contrast to Table 2 for equity returns and Table 4 for predictive ability, NI now dominates
both NI,,, and NIbrOad
in explaining executive cash compensation (significant at conventional
are not distinguishable in decision usefulness.
levels); and (2) NI,,, and NIbroad
Among income definitions that add one SFAS 130 component to NI, the results in
Table 5 reveal that: (3) the addition of PEN (rather than SEC as in Table 2 ) provides the
greatest value-relevance (statistically significant at conventional levels beyond SEC, but
not beyond FCT and OTH); (4) the addition of FCT and PEN yield an income definition
with decision usefulness greater than NI,30;( 5 ) the addition of FCT, PEN and OTH to NI
also provides an income definition with decision usefulness greater than NIbroad;
and (6)
the addition of SEC to NI yields decision usefulness smaller than for NI. Thus, these
findings for executive compensation differ from those for equity returns in terms of which
income measure dominates (NI versus NI,,,), whether individual components subtract
versus add decision usefulness and in terms of the contributions of individual components
(notably PEN versus SEC). They also differ from the predictive ability results in Table 4
where the results are inconclusive.
Among income definitions that add two SFAS 130 components to NI, Table 5 reveals
that: (7) the addition of FCT and PEN provides the greatest decision usefulness, larger
Gary C. Biddle and Jong-Hag CIzoi

Jvcrrnal of Coiiteriiporary Accounting & Ecoriomics Vol2, No 1 (June 2006)
25
1-32
Table 5
Relative Decision Relevance of Alternative Earnings Measures for Executive Cash Compensation (H,)
COMP,= a +b, [Nf,+ Added Component(s),]+ b,(NEG, x [",Added Cornponent(s),])+ b,[N/,~,+
Added Component(s),., ] + b, (NEG,., x "I,., + Added Component(s),., ]+ E,
COMP,=a +b,NI,+ b,(NEG, X Nl!) + b,NI,., + b,(NEG,.,x NI,.,) + b,Added Component(s),+
6, (NEG,X Added Component(s),) + b, Added Component(s),., +
6, (NEG,., x Added Component(s),.,)+ E,
(6)
(7)
Panel A: Analyses with income definition (equation 6 )
Biddle et al. (1995) Wald statistics for comparison against:

NI
NI,,,,
NI,,ro4d
Best model with
(Adj. R'
(Adj. R'
(Adj. R'
the same number
= 0.1303)
= 0.1264)
= 0.1226)
of added components
6.08**
3.47*
Added Component(s)
Adj. R*
None (=NI)
0. I303
NA
SEC
FCT
0. I270
-8.40"**
0.33
1.42
-9.24***
0.1302
-0.02
7.04***
3.39*
-0.23
NA
PEN
0.1303
-0.54
7.63***
3.68*
OTH
0. I267
-0.87
0.0 I
7.12***
NA
SEC, FCT
0.1261
-7.98***
-0.96
0.97
- l0.37***
SEC, PEN
0.1267
-6.66***
0. I5
I .28
-6.33**
SEC, OTH
0.1227
-3.48*
- 1.05
0.02
-3.43*
-0.97
FCT, PEN
0.1301
-0.08
9.22***
3.63"
NA
FCT, OTH
0. I267
-0.86
0.0 I
8.34***
-0.95
PEN, OTH
0. I268
-0.81
0.02
8.49***
-0.86
0.1264
-6.08**
NA
1.15
-0.02
SEC, FCT, PEN

( = NI,,, )
SEC, FCT, OTH
0.1224
-3.69*
-9.71***
-0.25
SEC, PEN, OTH
0.1228
-3.33*
-6.52***
0.12
FCT, PEN, OTH
0. I268
-0.77
0.02
0. I226
-3.47*
-1.15
SEC, FCT, PEN, OTH

( = NIbmad
)
-10.84***
-7.01***
10.27***
NA
NA
NA
26

Journal of Contemporary Accounting & Econornics Vol2, No I (June 2006) 1-32
Table 5 (Cont.)
Panel B: Analyses with income components (equation 7)
Biddle et al. (1995) Wald statistics for comparison against:
NI
(Adj. R*
NLO
(Adj. R2
NIbrmd
Best model with
(Adj. R2
the same number
= 0.1368)
= 0.1433)
of added components
Added Component(s)
Adj. R2
=0.1303)
None (=NI)
0.1303
NA
-3.21*
-12.80***
NA
SEC
0.1313
2.03
- I .66
- 1 1.12***
-5.31**
FCT
0.1354
1.13
-2.53
-13.47***
-3.91 **
PEN
0.1304
0.60
-2.8 1 *
-12.33***
-9.50***
OTH
0.1369
0.94
-3.16*
11.71***
NA
SEC, FCT
0.1370
2.79*
0.46
-1 1.62***
-4.24**
SEC, PEN
0.1314
2.58
-1.26
-10.60***
-5.18**
SEC, OTH
0. I376
-I OM***
-0.05
FCT, PEN
0.1354
-13.02***
-9.73***
FCT, OTH
0.1421
10.74***
3.49*
-2.39
NA
PEN, OTH
0.1405
12.68***
0.49
-2.63
-0.87
SEC, FCT, PEN
0.1368
( = NI,,, )
13.00***
1.53
3.2 1*
SEC, FCT, OTH
0.1431
I1.99***
2.48
-2.13
NA
- I 1.13***
-9.07***
9.07***
-0.7 1
NA
SEC, PEN, OTH
0.1413
13.84***
1.43
-1.55
FCT, PEN, OTH
0.1423
1 I .64***
4.47**
- 1.74
- I .02
-0.72
SEC, FCT, PEN, OTH
o, 1433
12.80***
11.13***
NA
NA
(=N
I b d
Adjusted R2 statistics for equations (6) and (7) for 5,349 firm-year observations. The dependent variable is COMP.
The predictors are the levels and the lagged levels of alternative income definitions defined by progressively
adding one, two, three or all four comprehensive income components to net income (NI). NEG equals I if the
corresponding variable is negative. The analyses are performed after removing outliers with absolute values of
standardized errors greater than 3. The adjusted R2of each model is compared with those of four benchmark
models, with the values of Biddle et a]. (1995) statistics reported in the corresponding rows/columns. The second
column reports the adjusted RZof each regression model. The Biddle et al. (1995) statistics reported in the third
column is a comparison against NI, the statistic in the fourth column is a comparison against NI,,,, the statistic in
the fifth column is a comparison against NIbn,&and the statistic in the rightmost column is a comparison against
the model with the largest adjusted RZamong the grouped models with equal numbers of added components.
The symbol '***' (**, *) represents that the result is significant at the 1 (5, 10) percent level. Variables are as
defined in Table I .

21
than f o r the additions of S E C and FCT, S E C and PEN and S E C and OTH, but
indistinguishable from the additions of other components; (8) the additions of FCT and
PEN, FCT and OTH and PEN and OTH, provide income definitions with decision usefulness
indistinguishable from NI, but greater than NIbro, (significant at conventional levels); (9)
the additions of FCT and PEN provides income definitions with decision usefulness greater
than NI,,, (significant at conventional levels); and (10) the additions of SEC and FCT,
SEC and PEN and SEC and OTH yield decision usefulness smaller than for NI ,but not for
NI,,, and NIbroad.
Among income definitions that add three SFAS 130 components to NI, Table 5 reveals
that: (1 1) the addition of FCT, PEN and OTH provides decision usefulness indistinguishable
from the addition of SEC, FCT and PEN = NI,,o, but greater than the other combinations
(statistically significant at conventional levels); (12) the addition of FCT, PEN and OTH
(significant
yields an income definition indistinguishable from NI but greater than NIbroad
at conventional levels); (13) the addition of SEC, FCT and PEN = SFAS,,,, SEC, FCT and
OTH and SEC, PEN and OTH yields decision usefulness smaller than for NI but
indistinguishable from NI,,, and NIbraad;
and (14) the addition of SEC, FCT and PEN =
NI,,{, yields decision usefulness greater than the addition of SEC, FCT and OTH and SEC,
PEN and OTH.
The results in Panel B of Table 5 for income component sets equation (7) reveal that,
consistent with the results for Table 2 equation (3) and Table 4 equation (5),the addition of
more components generally enhances decision usefulness. For executive compensation,
OTH adds the most explanatory power among individual components, The adjusted R2 for
NIbroad
is larger than for NI,,, and NI and NI,,,s is larger than for NI (all significant at
conventional levels). Analogously, the patterns of relative decision usefulness differ between
income definition equation (6) and components equation (7) and adjusted R2sare uniformly
larger for equation (7), lending further support to hypothesis H, and the disclosure of
comprehensive income components.
Considered together, the findings in Table 5 reveal in one view the decision usefulness
of 16 definitions of income available from SFAS 130 components for executive cash
in contrast to
compensation. For income definitions, NI dominates both NI,,, and NIb,t,ad,
the results for equity returns and predictive ability. For income components, once again
the more comprehensive set provides greater decision usefulness.
5.4 Income measures and disclosures ( H , and H,)
When combined across all three applications of information content, predictive ability
and executive compensation contracting, the results in Tables 2-5 for income definitions
lend support to hypothesis H,, namely that more (less) comprehensive definitions of income
are more decision useful for explaining equity returns (compensation contracting). The
results in Tables 2-5 for income component sets and comparisons between these results
and those for income definitions, lend support to hypothesis H, that it is decision useful to
disclose separately comprehensive income components.
28

Journal of Contemporary Accounting & Econonzics Vol2, No 1 (June 2006) 1-32
5.5 Robustness checks

Several alternative formulations were examined with results qualitatively similar to
those described above. First, observations were partitioned into financial, manufacturing
and other subsamples. Second, formulations in levels only, changes only and with NEG
dummies for returns specification predictors (similar to those used for executive
compensation) were examined, with similar findings. The results for executive compensation
became insignificant in the absence of the NEG dummies, consistent with the findings of
Gaver and Gaver (1998). Third, the information content results were found robust to the
introduction of control variables for year effects, firm size (natural logarithm of the previous
years ending market equity), growth potential (previous fiscal years ending book-tomarket ratio) and earnings persistence (dummy variable equal to 0 if the rank of firms
prior periods earnings-to-price ratio is in the highest or lowest quartile, otherwise I ) ,
following Ali et al. (1992), Ali and Zarowin (1992) and Cheng et al. (1996). Fourth, when
we use the change of future values rather than future values for predictive ability tests, the
results are consistent for income components (equation 5);for income definitions (equation
4), order is similar though results are generally less significant statistically. Fifth, the
compensation analysis was conducted using the undeflated change in executive cash
compensation, rather than the level of executive cash compensation scaled by market equity,
with qualitatively similar findings. We also performed the analyses year-by-year, 19941998. For both income definitions and income components, results are qualitatively similar
with those in Tables 2-5. Overall, our findings appear to be robust to alternative specifications.
6. Discussion and Summary
This study is motivated by a decades-long debate regarding a fundamental definition

in accounting, the comprehensiveness of income and the IASBs current consideration of
this question. A review of this debate reveals that investor interests have consistently
lobbied for more comprehensive measures of income whereas managers have lobbied to
exclude items over which they have less control. In this study we allow that these divergent
views may be justified. How? By allowing that different measures of income may be
more decision useful in different applications. Given the parties involved, three obvious
applications to examine are information content, predictive ability and executive
compensation contracting. This is the first study to systematically examine this proposition.
The adoption in the US of SFAS 130 in 1997 creates a natural experiment for comparing
16 different measures of income created from comprehensive income components. We
examine both income definitions and component sets. These comparisons provide insights
for the IASBs consideration.
Our findings for income definitions reveal that for information content, the definition
of comprehensive income adopted by the FASB in SFAS 130 (NI,30)dominates both net
In fact, it is not beaten by any of 15
income (NI) and fully comprehensive income (Nlbroad).
other definitions of income examined. Thus, in terms of information content, the FASB
appears to have chosen wisely. For predictive ability, no income definition clearly dominates
is better
in decision usefulness for the prediction of future operating income. But NIbroad

Journal of ContemporaryAccounting & Economics Vol2, No I (June 2006) 1-32
29
than all other measures in predicting future NI and NIbroAd,

while NI,,, is better than NI in
predicting itself, consistent with dominance in information content. NI better predicts
future operating cash flow. For executive compensation contracting, NI dominates both
comprehensive income measures in decision usefulness, consistent with the view of
managers and contracting arguments (e.g., Holthausen and Watts, 200 1). Thus, these results
for income definitions reveal a pattern strikingly consistent with the divergent views of
investors and managers, in that comprehensive income dominates for information content
and net income for compensation contracting.
Our findings for income component sets reveal that in all applications, decision
usefulness in enhanced with the introduction of more components. Here, NIbroad
provides
the greatest decision usefulness across all three applications: information content, predictive
ability and executive compensation contracting. The only exception is in the prediction of
statistically, NI,,, exhibits the largest predictive
NJ3,; although indistinguishable from NIhnwd
ability. Also, the component sets provide generally greater decision usefulness than
corresponding income definitions.These findings, when combined, support two primary
conclusions: ( 1) different definitions of income provide different decision usefulness in
different applications; and (2) it is decision useful to disclose separately comprehensive
income components. These conclusions lend .support to the IASBs (2003) proposal to
require the disclosure of comprehensive income and the view that different components
of comprehensive income are useful in different ways to users of the accounts (IASB,
2002, 10).
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Is Comprehensive Income Useful?

Gary C. B i d d l e a * and Jong-Hag C h o i a , b *

Received November 2004; Accepted March 2006

J E L Classifications: M41, G12, G31

Gary C. Biddle and Jong-Hag Choi

Gary C. Biddle and Jong-Hag Choi

Gary C. Biddle and Jong-Hag Choi

of Contemporary Accounting & Economics Vol2, N o I (June 2006)

2. Comprehensive Income: Debate and Evidence

Paton (1934), May (1937) and Littleton (1940).

Gary C. Biddle and Jong-Hag Choi

the American Accounting Association Financial Accounting Standards Committee

Gary C. Biddle and Jong-Hag C h i

Gary C. Biddle and Jong-Hag Choi

lJSee also Smith (2001) and Liesrnan and Weil (2001).

Gary C. Biddle and Jong-Hag Choi

component sets. By income definition we refer to the number obtained by algebraically

3. Approach and Tests

H,: Information content (equity returns).

H,: It is decision useful to disclose comprehensive income components separately.

Cavy C. Biddle and Jong-Hag Choi

Gary C. Biddle and Jong-Hag Choi

than only definitions if either association is enhanced or patterns of association differ in

4.2 Variable measurement

Gary C. Biddle and Jong-Hag Choi

Adjustment for unrealized holding gains/losses on marketable securities

Gary C. Biddle and Jong-Hag Choi

Operating cash flow

Executive cash compensation

4.3 Data characteristics

Gary C. Biddle and Jong-Hag Choi

NIhrood 0.6884 (0.8750) 0.6898 (0.9152)

Panel B: Variable distribictiorts

Gary C. Biddle and Jong-Hag Choi

5.1 Information content (H,)

+ Added Component(s),] + b, I,., + Added Component(s),., It- E ,

Gary C. Biddle and Jong-Hag Choi

+ b, I, + Added Component(s)l] + b, I,., + Added Cornponent(s),.,]+ E ,

Panel A: Analyses with income dejinition (equation 2)

Biddle et al. (1995) Wald statistics for the comnarison against:

Best model with

the same number

= 0.0253) of added components

SEC, FCT, PEN

SEC, FCT, OTH

SEC, PEN, OTH

FCT, PEN, OTH

SEC, FCT, PEN, OTH

Gary C. Biddle and Jong-Hag Choi

Panel B: Analyses with income components (equation 3 )

the same number

Best model with

SEC, FCT, OTH

SEC, PEN, OTH

FCT. PEN. OTH

SEC, FCT, PEN

SEC, FCT, PEN, OTH

Gary C. Biddle and Jong-Hag Choi

(-12.86) (5.28) (0.07)

(-10.98) (9.47) (-2.89) (3.12)(-0.73)

(-9.20) (8.21) (0.44)

(4.23) (4.96) (-0.45)

(2.58*) (-2.28) (9.89***) (1.57)

(4.12) (5.07) (-0.53)

(-9.67) (8.30) (1.17)

(10.48, 9.25, NA)

(NA, -6.62, -6.93*)

(NA, -16.15*, -6.05)

(NA, -28.68, -14.74)

(16.15, NA, 11.09)

(6.05, - 1 1.09*, NA)

(5.07, 5.31, NA)

(37.54, 50.84, NA)