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The influence of other comprehensive income on discretionary expenditures

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  • Roger C. Graham
  • K.C. Lin

Abstract

Other comprehensive income items (OCI) increase and decrease book value and therefore indicate more or less firm value. It follows that OCI items, albeit transitory, may contribute to a wealth effect that influences expenditure decisions. In support, our regression results indicate an association between current year OCI and future discretionary financing, investing, and operating expenditures. However, we also find that OCI†influenced expenditures are not associated with future profitability, suggesting such expenditures are not value creating. In further tests, we find that future discretionary expenditures are associated with both positive OCI and negative OCI for higher leveraged firms but only associated with positive OCI for lower leveraged firms. These results suggest that, for highly leveraged firms, positive OCI loosens debt constraints on future expenditures while negative OCI tightens debt constraints on future expenditures. For firms without debt constraints the results are suggestive of possible wealth transfers from debtholders to shareholders.

Suggested Citation

  • Roger C. Graham & K.C. Lin, 2018. "The influence of other comprehensive income on discretionary expenditures," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 45(1-2), pages 72-91, January.
    • Handle: RePEc:bla:jbfnac:v:45:y:2018:i:1-2:p:72-91
    DOI: 10.1111/jbfa.12284
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    Cited by:

    1. Yiting Cao & Qi (Flora) Dong, 2020. "Does reporting position affect the pricing of the volatility of comprehensive income?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1113-1150, October.
    2. Zhang, Ailian & Wang, Shuyao & Liu, Bai & Fu, Jingyuan, 2020. "The double-edged sword effect of diversified operation on pre- and post-loan risk in the government-led Chinese commercial banks," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).

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