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Does The Comprehensive Income Matrix Make Unsophisticated Users Overemphasise Fair Value Income?

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  • P. VAN CAUWENBERGE

    ()

  • I. DE BEELDE

    ()

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    Abstract

    This paper reports on an experiment that was conducted to investigate the degree of significance that unsophisticated users attach to fair value income (FVI) for valuation-relevant tasks, given that the matrix of comprehensive income applies. The prominent display of FVI therein is at odds with the limited significance of FVI for valuation. Specifically for unsophisticated users, who rely on financial reports to signal the importance and meaning of financial items, a concern exists that FVI might be overemphasised. This paper investigates this issue and formulates and tests two suggestions, intended to keep unsophisticated users from overemphasising FVI: 1) education about the irrelevance of FVI for valuation; and 2) a two-column matrix that does not display a separate column for total comprehensive income. Participants were provided with the financial reports of two fictitious manufacturing companies, and performed valuation-relevant tasks: income prediction, risk assessment, and management evaluation. The financial reports were devised in such a way that they allowed to infer the significance participants attached to FVI. For income prediction and risk assessments, participants did not attach significance to FVI. However, for management evaluation, FVI was taken into account, however this occurred to a lesser extent when total comprehensive income was not displayed.

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    File URL: http://www.feb.ugent.be/nl/Ondz/wp/Papers/wp_06_400.pdf
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    Bibliographic Info

    Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 06/400.

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    Length: 34 pages
    Date of creation: Jul 2006
    Date of revision:
    Handle: RePEc:rug:rugwps:06/400

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    Related research

    Keywords: Comprehensive income matrix; fair value income; valuation; user sophistication; education; display.;

    This paper has been announced in the following NEP Reports:

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    1. James G. March & Zur Shapira, 1987. "Managerial Perspectives on Risk and Risk Taking," Management Science, INFORMS, vol. 33(11), pages 1404-1418, November.
    2. Ball, Ray & Bartov, Eli, 1996. "How naive is the stock market's use of earnings information?," Journal of Accounting and Economics, Elsevier, vol. 21(3), pages 319-337, June.
    3. Clark-Murphy, Marilyn & Soutar, Geoffrey N., 2004. "What individual investors value: Some Australian evidence," Journal of Economic Psychology, Elsevier, vol. 25(4), pages 539-555, August.
    4. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    5. Kormendi, Roger & Lipe, Robert, 1987. "Earnings Innovations, Earnings Persistence, and Stock Returns," The Journal of Business, University of Chicago Press, vol. 60(3), pages 323-45, July.
    6. Paul A. Samuelson, 1973. "Proof That Properly Discounted Present Values of Assets Vibrate Randomly," Bell Journal of Economics, The RAND Corporation, vol. 4(2), pages 369-374, Autumn.
    7. Ou, Jane A. & Penman, Stephen H., 1989. "Financial statement analysis and the prediction of stock returns," Journal of Accounting and Economics, Elsevier, vol. 11(4), pages 295-329, November.
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