Value-relevance of multiple-step income statement – an analysis of earnings components

Abstract

The value relevance of accounting earnings has attracted the attention of researchers for decades. However, how important earning components provided by multiple-step income statement relative to earnings has limited evidence. Studies do show that earnings components provide additional value-relevance to earnings; but it is not clear if the relative additional value-relevance of earnings components beyond earnings can be systematically affected by firm characteristics. I focus on investigating if more detailed disaggregation in a multiple-income statement affects the additional value-relevance of earnings components beyond earnings. I use a recent paper's measure of the disaggregation quality (DQ) and find that higher DQ increases both value relevance of earnings and earnings components. I also find that DQ has a positive effect on the additional explanatory power of earnings components beyond earnings. Moreover, I find that this positive relation is especially strong for firms with high information uncertainty. My finding suggests that even highly disaggregate earnings information can help the analysts to improve earnings forecasts and the market to evaluate earnings but this help has minor effect on the additional value-relevance of earnings components. Studies using value-relevance of earnings to measure a firm's financial reporting quality may also consider value-relevance of earnings components.