Persistence, Capitalization Coefficients, and Value Relevance of the Multi-step Income --- The Information Contents of the Multi-step Income Statement in Japan ---

This paper investigates the attributes of the multi-step income 1) operating profits, 2) earnings before tax, special and extra-ordinary items, and 3) net income, and then this paper confirms the rationality of the multi-step performance reporting. We examine the relationship between the persistence and the capitalization coefficients that is estimated by regressing stock prices on the multi-step income, and the relationship between the persistence and the value relevance. The results show that the persistence, capitalization coefficients, and the value relevance do not necessarily correspond with each other by the industry and by the year. Each index reflects the different attitudes of earnings or income. The definition and concept of earnings quality and the measure of quality should be developed more rigorously in the future. The above results partly support the current reporting form in Japan, which divide net income into profits and earnings having different attributes. However, we find that, by modifying the dividing line, investors could calculate another multi-step income that is superior in the persistence, capitalization coefficients, and the value relevance to the reported income. Therefore, the current rule and the firm's operation of the classification of income components is not necessarily the best way for the decision usefulness. These results imply that there is room for improving the form of performance reporting in Japan.