Components of Other Comprehensive Income Increase Uncertainty and Reduce Analyst Forecasting Ability

Posted: 17 May 2019

See all articles by Neal Arthur

Neal Arthur

University of Sydney

Victoria J. Clout

School of Accounting, UNSW Business School, UNSW Australia; Financial Research Network (FIRN)

Tina Huynh

The University of Sydney - Discipline of Accounting

Meishan Mai

The University of Sydney - Discipline of Accounting

Date Written: April 18, 2019

Abstract

This study examines the relationship between components of OCI and analysts’ forecasting behaviour, being forecast accuracy, analyst following and herding. The findings show that cash flow hedge (CFH) and foreign currency (FCX) elements are negatively associated with forecast accuracy and herding. We also find that available for sale (AFS) amounts are positively associated with forecast accuracy, herding and analyst following. Together with prior evidence, our findings provide empirical evidence that some OCI items (CFH and FCX) may increase uncertainty and make it more difficult for analysts to predict net income, and other OCI items (AFS) may be used by management to smooth net income, making net income less volatile and easier to predict. These results suggest that market participants benefit from more transparent OCI disclosures.

Keywords: other comprehensive income, accounting policy, forecasting, analyst behaviour

JEL Classification: M41, G12, G31, E37

Suggested Citation

Arthur, Neal and Clout, Victoria J. and Huynh, Tina and Mai, Meishan, Components of Other Comprehensive Income Increase Uncertainty and Reduce Analyst Forecasting Ability (April 18, 2019). UNSW Business School Research Paper Forthcoming. Available at SSRN: https://ssrn.com/abstract=3374623

Neal Arthur

University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Victoria J. Clout (Contact Author)

School of Accounting, UNSW Business School, UNSW Australia ( email )

Sydney, NSW, NSW 2052
Australia
+6193856957 (Phone)

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Tina Huynh

The University of Sydney - Discipline of Accounting ( email )

H69 Codrington Building
Sydney, NSW 2006
Australia

Meishan Mai

The University of Sydney - Discipline of Accounting ( email )

H69 Economics and Business Building
Sydney, NSW 2006
Australia

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