Does More Prominent Presentation Format Improve Information Usefulness? Limited Attention and Information Quality Effects
Prof. Morris LIU
Associate Professor in Accounting
FBA, UM
Date: 30 January 2024 (Tuesday)
Time: 1:00pm to 2:00pm
Venue: FBA Lobby
Abstract
We investigate how the presentation format of other comprehensive income (OCI) affects the market’s information use in China. US-based studies suggest that a more prominent placement in the statement of comprehensive income (SCI), rather than in the statement of shareholders’ equity (SSE), lowers the usefulness of OCI information for investors. The negative market consequence is contrary to the expected benefits of accounting standard-setters. To explore the “puzzle,” we focus on the Chinese context where the effect of reporting format is expected to be more salient, because of higher alleviation of limited investor attention (“limited attention effect”) and greater improvement in the quality of OCI information (“information quality effect”). In a sample of Chinese A-share firms, we document that the change in the reporting location of OCI from SSE to SCI enhances its value relevance. Consistent with the limited attention mechanism, we find that the market benefit is stronger for firms with less investor attention, proxied by lower analyst forecast frequency, less media coverage, and lower institutional ownership. In support of the information quality mechanism, we show that the valuation impact is larger for firms with more enhanced relevance and reliability of OCI information, as reflected by increased predictability for future performance and reduced earnings management through the cherry-picking of financial assets measured at fair value through OCI. Our findings contribute to the literature on the benefits of transparent financial reporting and shed new light on the regulatory efficacy of mandating an income statement-type format of OCI reporting in emerging markets.
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