Decision-usefulness of Dirty Surplus Flows for Equity Investors in the United States: A Study of Value Relevance

Maximilian Schindler & Yannic Schott

Student thesis: Master thesis


The objective of this thesis is to assess whether the introduction of the comprehensive income statement as introduced by the Statement of Financial Accounting Standards No. 130 (FASB, 1997) has contributed to the quality of financial reporting and, hence, alleviates information asymmetries between ownership and management of companies. Therefore, this study investigated both confirmatory and predictive value relevance of reported other comprehensive income items for the 200 largest U.S. firms measured by market capitalization during the period 2005 to 2017. This thesis identifies a significant positive association between other comprehensive income flows and returns for the short- and medium-term. For the long-term, this relationship fades away due to the transitory nature of dirty surplus flows which indicates the recycling of earnings. Therefore, our findings provide evidence of confirmatory value relevance of other comprehensive income items. Furthermore, we do not find any evidence of an association between predicted dirty surplus flows and valuation errors of accounting-based valuation models. Thus, reporting other comprehensive income flows in a separate financial statement does not provide investors with any information containing predictive value. Moreover, we find that the residual income valuation model and the abnormal earnings growth model are equally fit to account for the presence of dirty surplus flows under the assumption of consistency in forecasted accounting numbers. According to the definition of the Joint Conceptual Framework of FASB and IASB, either confirmatory or predictive value relevance, or both, are criteria for decision-usefulness. Consequently, reporting other comprehensive income flows has provided decision-usefulness to equity investors and contributed to the quality of financial reporting. The findings of this study are of relevance to both investors and accounting standard setters, as information about the reliability and usefulness of financial reporting is in their shared interest

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2021
Number of pages114