Value Relevance of Summary Accounting Income Measures: Evidence from Major European Capital Markets

This study investigates the extent to which three key summary accounting income figures, namely operating income (OPI), net income (NI) and comprehensive income (CI), provide value-relevant information to investors in major EU capital markets. Using a large sample over the pre-IAS-compliance period (1992-2004), we find that all these three figures are statistically associated with share returns in any of the countries under analysis although disparities in the degree of 'usefulness' appear across samples. Our main results are then threefold. We first provide evidence that CI is less value-relevant than both NI and OPI in all the sample countries. Second, our results show that aggregate OCI is value-relevant and generally provides incremental price-relevant information beyond NI. This finding is rather different from the existing US literature that suggests OCI is usually not value-relevant especially when not separately disclosed in financial statements. Finally, considering early adoption firms, we find that increased transparency on reporting OCI as required by the UK FRS3 and US SFAS130 standards may have warranted a stronger statistical association between share returns and CI. This last finding therefore strongly supports the ideology underlying the IASB/FASB 'Performance Reporting' joint project, and provides evidence supporting Beaver's (1981) psychology-based financial reporting theory.