A Critical Note on Empirical Comprehensive Income Research

This paper presents a critical analysis of empirical comprehensive income research, the majority of which consists of value relevance studies. The first part of the analysis focuses on the functional form of the value relevance regressions. The paper distinguishes between the informational and the measurement approach to value relevance research and systematically traces the origin of the specifications under both approaches. The informational approach is characterized by diversity in functional form specifications, which can be traced to differences in expectations models for earnings or price/earnings ratios. In the light of this diversity, it is remarkable to observe that most of the authors provide little or no argumentation for the choice of their particular functional specification. While the authors under the measurement approach try to legitimize their regression specifications by referring to the work of Ohlson, in fact, one of the contributions of the residual income model is that it demonstrates the restrictive nature of these specifications. The second part of the paper performs a detailed investigation of the empirical findings. This analysis reveals several peculiarities that defy economic intuition. These peculiarities are nontrivial since they, together with the low explanatory power of the regressions, affect the credibility of the main research findings. The conclusion of the paper is that there is danger in taking the empirical findings of this research domain at face value and that the potential for informing standards setters is limited.