The influence of other comprehensive income on discretionary expenditures

Roger C. Graham, K. C. Lin

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

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.

Original languageEnglish
Pages (from-to)72-91
Number of pages20
JournalJournal of Business Finance & Accounting
Volume45
Issue number1-2
DOIs
StatePublished - Jan 1 2018
Externally publishedYes

Keywords

  • debt constraints
  • discretionary investing
  • financing and operating expenditures
  • other comprehensive income
  • wealth effect
  • wealth transfers

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