Date of Award


Document Type


Degree Name

Doctor of Philosophy (PhD)



First Advisor

Andrew A. Christie

Second Advisor

Mimi Alciatore


The distinction between permanent and transitory earnings is important when using accounting earnings to predict future dividends. To the extent that net income includes transitory items, it is less useful in predicting future dividends, and thus, less useful in valuing the firm. If comprehensive income includes more transitory items than net income, it is less useful than net income in valuing the firm. This study contributes to the literature in two ways. First, a definition of permanent earnings is developed that is based on the relation between earnings and expected future dividends. The study illustrates the relation between permanent, transitory, and unexpected earnings, and demonstrates the consequences of using unexpected earnings instead of the change in permanent earnings when regressing stock returns on an earnings measure. Second, the study provides evidence as to the relative usefulness of net income and comprehensive income in modeling firm value by testing whether items of other comprehensive income (OCI) as defined under SFAS No. 130, Reporting Comprehensive Income , are related to firm value. Data for the study are hand gathered from 126 firms over 11 years (1986--1996). The results show that items of OCI are not related to firm value, as measured by annual returns. The results are robust to all model specifications and econometric methods used. Further, items of OCI are found to exhibit small positive autocorrelation and have zero mean. This is consistent with the prediction that items of OCI are transitory.