Office Hours: Who's Afraid of Performance Reporting?
Kathy Petroni (Michigan State) will be joining us June 10th, 11am ET, to talk about her paper “Comprehensive Income: Who’s Afraid of Performance Reporting?”. The paper, co-authored with Linda Bamber, John Jiang and Isabel Wang, now forthcoming in The Accounting Review, touches on some timely and controversial topics.
For starters, let me say that the primary result is not that surprising to me: managers don’t like putting volatile numbers (such as gains and losses from “available for sale” securities) right into the face of their income statement, especially when they have more equity-based incentives and less job security. Instead, they tuck this information into the Statement of Changes in Shareholders Equity, which in my own research I have learned don’t attract nearly as much attention as the income statement.
But here are some open questions for future research that I expect we will discuss tomorrow:
- First, could the managers be wrong about what investors want? People avoid flying because they think of it as dangerous, even though driving the same number of miles is typically more dangerous. Perhaps managers are avoiding a phantom risk.
- Second, could the FASB and IASB be wrong about what investors want? It isn’t just a matter of standard setters wanting all comprehensive income items shown on the face of the income statement. More generally, the Boards have largely bought into an ‘asset-liability approach’ that treats assets and liabilities as primary, and comprehensive income is just a plug figure equal to the change in net assets. Apparently, managers believe that investors choose an income approach, in which the primary goal of financial reporting is to generate meaningful measures of income–even if it takes putting items on the balance sheet that aren’t assets or liabilities, but just plugs needed to get a smoother, more meaningful income number. If the managers are right, is the Board making a mistake by providing investors with statements that give a more meaningful balance sheet but a more volatile income statement?
There are plenty of other issues to talk about, and I hope you will join us–and perhaps post your own questions in the comment thread below.
Details about office hours are available here.