CIRJE-J-93. Obinata, Takashi, "Relevance of Earnings Components: Evidence from Manufacturing Firms in Japan\ Part II Industry-Period Analysis \", April 2003.

This paper investigates the value relevance of components of net income by industries and periods. Net income is divided into three components, i.e. operating profits, financial income (including non-core operating profits), and other income (extraordinary items, special items and taxes), which are mandatorily disclosed in Japanese accounting system as known 'multi-step calculation of net income'. Financial income and other income are usually considered noisy. Many accountants think that they are only annexed items in measuring net income and less value-relevant than operating profits. The main purpose of this paper is to clarify the value relevance of income components and research the variations in relevance across industries and periods. We focus on the levels and changes in components, considering the potential and many-faceted informativeness of earnings. In addition, we focus on the sign, i.e. positive vs. negative (loss)' and 'increase vs. decrease'. Moreover, we apply some meta-analysis to the estimated results obtained by OLS.

The major findings in this research are as follows. First, we cannot observe the disparity between periods in the value relevance of financial income and other income. However, they are not value-relevant in all industry-periods. This evidence supports the characteristics of them that are traditionally convinced by accountants as mentioned above. Second, though dividing financial income into positive and negative (loss) is sometimes meaningless, financial loss has the relevance that is different from other components. Third, the value relevance of decrease in operating profits and that of decrease in other income are similar; the decrease is more persistent, in the recent recession, than the increase. Fourth, the persistence of the decreased operating profits and the decreased financial income is affected by average performance level in the industry. However, the effect is in the opposite direction. These results show that each component has its inherent value relevance.