On the Usefulness of Operating Income, Net Income and Comprehensive Income in Explaining Security Returns

C. S.Agnes Cheng, Joseph K. Cheung, V. Gopalakrishnan

Research output: Journal article publicationJournal articleAcademic researchpeer-review

45 Citations (Scopus)

Abstract

This study evaluates the usefulness of three earnings definitions (operating income, net income and comprehensive income) in explaining residual security returns. Usefulness is measured in terms of relative information content and incremental information content. In the former, the goodness-of-fit of the return-earnings relationship is compared under each earnings definition. In the latter, the increase in goodness-of-fit due to additional earnings components is measured. Based on a sample that averages 922 firms a year for 18 years, the analysis shows that operating income weakly dominates net income, and that both operating income and net income dominate comprehensive income, in information content. The results also show that those items that account for the difference between net income and operating income have incremental information content, but not those between net income and comprehensive income. The practical and academic contributions of these findings are discussed.

Original languageEnglish
Pages (from-to)195-203
Number of pages9
JournalAccounting and Business Research
Volume23
Issue number91
DOIs
Publication statusPublished - 1 Jun 1993
Externally publishedYes

ASJC Scopus subject areas

  • Accounting

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