Journal Articles

Comprehensive Income Reporting and Analysts’ Valuation Judgments

1998, Journal of Accounting Research

D. Hirst, Patrick E. Hopkins


We investigate whether clear disclosure of comprehensive income (CI) facilitates detection of earnings management by buy-side financial analysts and predictably affects their security price judgments. Because analysts and investors often must sort through voluminous footnotes and non-financial information to locate CI components and other value-relevant items, the Association for Investment Management and Research has recommended changes in the reporting of these items. In June 1997, the FASB issued SFAS No. 130-Reporting Comprehensive Income in response to this demand.

The efficient markets hypothesis suggests that this reformatting of the financial statements should not affect analysts' judgments. However, psychology research predicts that information will not be used unless it is both available and readily processable (i.e., clear). Therefore, we argue that analysts' valuation judgments will be affected by the clarity of CI disclosure.

The results of an experiment, in which 96 analysts participated, suggest that clear income statement (IS) disclosure of CI-as originally proposed in the FASB's CI Exposure Draft-enhances the transparency of a company's earnings management activities and reduces analysts' valuation judgments to the same level observed for a firm that does not manage its earnings. In contrast, we find that disclosure of CI in the statement of changes shareholders' equity-as allowed by SFAS No. 130 and likely to be adopted by a majority of US companies-is not as effective as IS disclosure in revealing earnings management. We discuss the implications of this study for users of financial accounting information and for accounting standard setters.


Hirst, D. E. and P. E. Hopkins (1998), “Comprehensive Income Reporting and Analysts’ Valuation Judgments,” Journal of Accounting Research, Supplement, pp. 47-75.

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