TY - JOUR
T1 - On the Usefulness of Operating Income, Net Income and Comprehensive Income in Explaining Security Returns
AU - Cheng, C. S.Agnes
AU - Cheung, Joseph K.
AU - Gopalakrishnan, V.
PY - 1993/6/1
Y1 - 1993/6/1
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=33749000089&partnerID=8YFLogxK
U2 - 10.1080/00014788.1993.9729879
DO - 10.1080/00014788.1993.9729879
M3 - Journal article
AN - SCOPUS:33749000089
VL - 23
SP - 195
EP - 203
JO - Accounting and Business Research
JF - Accounting and Business Research
SN - 0001-4788
IS - 91
ER -