Study On Value Relevance Of Earnings Components

Stock market is an information-sensitive market. Accounting information is the core information disclosed by listed firms. The value relevance of accounting information is mainly reflected on the usefulness for stakeholders when making decisions. Meanwhile, only the accounting information with high value relevance truly and unbiasedly reflects operating conditions of listed firms, which is useful for stakeholders to make reasonable decisions, and promotes the healthy and sustainable development of the capital market.The value relevance of accounting earnings has been widely proven. However, the value relevance of earning components is notably different. Nevertheless, studying on it starts late, few results have been obtained. The existing research methods can be classified into two types:decomposition based on profit statement, or according to accruals. This paper adopts the first method to decompose the profit statement by three steps. Firstly, profit statement is divided into net profit and Other Comprehensive Income. Then the paper studies the value relevance of them, and a comparison on value relevance between them is carried out. Then, based on fair value measurement, further decomposition are implemented:First, net profit is divided into Gains or Losses from Changes in Fair Values and others. The value relevance of them, and the comparison between them are analyzed. Second, this paper divides Other Comprehensive Income into fair value measurement component and non-fair value measurement component, Similarly, studies on the value relevance of them and a comparison is given. Considering the robustness of results, this paper tests samples by groups of manufacturing firms and non-manufacturing firms, state-owned and non-stated-owned firms. What’s more, for the latter two parts, this paper also respectively tests sample firms in eastern, central and western areas.This paper uses the A-share listed firms’ data from 2010-2014, and adopts the return model to make the following conclusions.Net profit and Other Comprehensive Income both have value relevance, and the former is higher, which are applicable to manufacturing firms, non-manufacturing firms, state-owned and non-stated-owned firms. Gains or Losses from Changes in Fair Values and others in net profit both have value relevance, and the latter is higher, which are applicable to manufacturing firms, non-manufacturing firms, and non-state-owned firms but not state-owned firms. The value relevance of Gains or Losses from Changes in Fair Values is greatly influenced by the regional difference. Fair value measurement component in Other Comprehensive Income has value relevance but other component doesn’t, which applies to manufacturing firms, non-manufacturing firms, state-owned and non-stated-owned firms. The value relevance of fair value measurement component in Other Comprehensive Income is also impacted by regional difference. In all, as to the value relevance of fair value, the eastern area is of highest value relevance, the central is less, while the west indicates almost none.