Do stock prices fully reflect the predictive ability of other comprehensive income?

Rich, Joseph (2014). Do stock prices fully reflect the predictive ability of other comprehensive income? Honours Thesis, UQ Business School, The University of Queensland.

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Author Rich, Joseph
Thesis Title Do stock prices fully reflect the predictive ability of other comprehensive income?
School, Centre or Institute UQ Business School
Institution The University of Queensland
Publication date 2014
Thesis type Honours Thesis
Supervisor Allan Hodgson
Total pages 101
Language eng
Subjects 1502 Banking, Finance and Investment
Abstract/Summary Is Other Comprehensive Income (OCI) relevant to the value of a firm? Even if it is, do investors understand this and price it accordingly? The purpose of this thesis is to demonstrate the value relevance of OCI through an examination of its inherent time-series properties, and reconcile the mixed findings of the past through an examination of market mispricing. We first investigate the objective time-series properties of OCI by looking at its predictive ability in two respects: its ability to predict future values of itself (the persistence), as well as its incremental ability to predict future amounts of Net Income (the predictive value). Additionally, we investigate whether insider trading acts as an information signal by disseminating any private information about the true properties of particular OCI. Lastly, we decompose OCI into its major components, and also conduct a comparison OCI and pricing implications in the periods either side of the 2007-2008 Global Financial Crisis. Our results show that OCI exhibits negative persistence from period to period, but holds incremental predictive value for future values of Net Income. This study thus shows the value relevance of OCI through its objective time-series properties for predicting future Net Income, and reconciles the mixed findings of prior OCI literature with evidence of market mispricing. This paper would therefore prove useful to market participants concerned with the efficient pricing of financial markets, but most importantly to standard-setting bodies regarding the nature of OCI and the overall definition of income.

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Created: Wed, 25 Feb 2015, 15:49:52 EST by Karen Morgan on behalf of UQ Business School