Relative Versus Incremental Information Content

24 Pages Posted: 23 Aug 1998 Last revised: 21 Sep 2015

See all articles by Gary C. Biddle

Gary C. Biddle

University of Melbourne - Faculty of Business and Economics; Columbia Business School; HKU Business School; London Business School

Gim-Seong Seow

University of Connecticut - Department of Accounting

Andrew F. Siegel

University of Washington - Department of Finance and Business Economics; National Bureau of Economic Research (NBER)

Date Written: October 4, 2012

Abstract

This study distinguishes between incremental and relative information content. Incremental comparisons ask whether one accounting measure provides information content beyond that provided by another, and apply when one measure is viewed as given and an assessment is desired regarding the incremental contribution of another (e.g., a supplemental disclosure). Relative comparisons ask which measure has greater information content, and apply when making mutually exclusive choices among alternatives, or when rankings by information content are desired (e.g., when comparing alternative disclosures). Questions of both incremental and relative information content arise frequently in accounting. However, few previous studies have examined questions of relative information content. Possible explanations include unfamiliarity with the relative versus incremental distinction, and the additional statistical complexity involved in testing for relative information content. First, we examine analytically the relation between incremental and relative information content, demonstrating that they address different research questions and that different tests for statistical significance are required. Second, we identify accounting research contexts in which questions of relative and incremental information content arise. Third, we propose a new regression-based test for relative information content. This test applies to both returns and valuation studies, generalizes to any number of predictor variables, and can be used in conjunction with White's (1980) adjustment for heteroskedasticity. Fourth, we illustrate tests for relative and incremental information content in a familiar research setting that compares the information contents of net income, cash flows, and net sales in 40 industries.

JEL Classification: G12, M41

Suggested Citation

Biddle, Gary C. and Seow, Gim-Seong and Siegel, Andrew F., Relative Versus Incremental Information Content (October 4, 2012). Contemporary Accounting Research, Vol. 12, No. 1, Fall 1995, Available at SSRN: https://ssrn.com/abstract=2505

Gary C. Biddle (Contact Author)

University of Melbourne - Faculty of Business and Economics ( email )

Level 8, Dept of Accounting
198 Berkeley Street, Carlton
Melbourne, Victoria 3010 3010
Australia
61-3-8344-9807 (Phone)
61-3-9349-2397 (Fax)

HOME PAGE: http://https://findanexpert.unimelb.edu.au/profile/774767-gary-biddle

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

HKU Business School ( email )

00000
Hong Kong

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Gim-Seong Seow

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States
203-486-3019 (Phone)
203-486-4838 (Fax)

Andrew F. Siegel

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
Seattle, WA 98195
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
458
Abstract Views
6,003
rank
70,483
PlumX Metrics