Value Relevance of Earnings Components in the Income Statement

This paper investigates the value relevance of earnings components in the income statement, paying attention to the inter-period allocation of earnings. While prior studies only examine the pattern of allocation, this research examines both the relationship between the components in the year and the trends of components across years. The results show that the firms achieving income smoothing, loss avoidance and big bath, which are identified by the behavior of earnings components, have the different relevance of earnings from other firms. These results imply that dividing earnings into components enables investors to detect the earnings management and that earnings information becomes more useful when investors use the information of earnings components in the income statement.