Essays on Other Comprehensive Income

Abstract

In Chapter 1, I review the existing literature on the investor and contracting usefulness of other comprehensive income (OCI) components. In Chapter 2, I perform empirical tests focused on one aspect of investor usefulness of accounting information: risk-relevance. I examine whether OCI component volatilities are associated with investors' returns volatility using a sample of bank holding companies from 1998 to 2012. The results indicate that the volatilities of unrealized gains and losses on available-for-sale (AFS) securities and cash-flow hedges, typically deemed beyond managers' control, are negatively associated with risk, while volatilities of OTTI losses, over which managers have relatively more control, are positively associated with risk. The results are consistent with investors perceiving the volatility of non-OTTI AFS unrealized gains and losses as relatively less important, less risky, or less risk-relevant, than the volatility of OTTI losses, and perceiving the volatility of OTTI losses as an informative signal about risk. In Chapter 3, I find that Tier 1 Capital including more components of accumulated other comprehensive income (AOCI), as stipulated by Basel III, is no more volatile than pre-Basel-III Tier 1 Capital, and that the volatilities of the AOCI components new to Tier 1 Capital are not positively associated with risk. In Chapter 4, I discuss future research.