Implications of Comprehensive Income Disclosure For Future Earning and Analysts’ Forecasts

This paper examines the association of comprehensive income with subsequent period net income as well as analysts’ earnings forecasts. Our results support the notion that comprehensive income is incrementally useful in predicting subsequent period changes in net income. We also document that comprehensive income is associated with analysts’ earnings forecast revisions and forecast errors. The evidence is consistent with analysts’ failure to fully utilize the information disclosed in comprehensive income. The result suggests that analysts revise their year t+1’s forecast downward when comprehensive income is smaller than net income but they do not revise the forecast upward when comprehensive income is greater than net income. This evidence on the asymmetric use of comprehensive income is consistent with the notion that the future recognition of unrecognized Seoul Journal of Business Volume 12, Number 2 (December 2006) * Main author, Assistant Professor, College of Business Administration, Seoul National University ([email protected]). ** Coauthor, Assistant Professor at School of Accountancy, Singapore Management University ([email protected]). The authors wish to thank Gary Biddle, Kevin Chen, Chul Park, Stephen Penman, P. K. Sen, T. J. Wong, Huai Zhang, and seminar participants at the Hong Kong University of Science & Technology for the comments on early versions of this paper. The authors also gratefully acknowledge I/B/E/S. Inc. for providing earnings forecast data. This data has been provided as part of a broad academic program to encourage earnings expectations research. losses is more predictable than the future recognition of unrecognized gains.