Cherry Picking, Disclosure Quality, and Comprehensive Income Reporting Choices: The Case of Property-Liability Insurers*

Yen-Jung Lee, Kathy R. Petroni, Min Shen

Contemporary Accounting Research · 2006 · Volume 23 · Issue 3

Abstract

Statement of Financial Accounting Standards No. 130: Reporting Comprehensive Incomeencourages enterprises to report comprehensive income on a performance statement rather than on a statement of equity. We investigate the reporting decisions of 82 publicly traded property-liability insurers that are fairly evenly split in their choice. Our results demonstrate that insurers with a tendency to manage earnings through realized securities' gains and losses (that is, cherry pickers), as well as insurers with a reputation for poor disclosure quality, are more likely to report comprehensive income in a statement of equity. Apparently, these insurers face the highest cost of transparency. We do not find a relation between the reporting decision and the volatility of comprehensive income relative to the volatility of net income. Our findings that insurers' comprehensive income reporting choices are a reflection of their proclivity toward cherry picking as well as their level of disclosure quality should be of interest to standard-setters because of the controversy over standard-setters' preference for mandating all firms to report comprehensive income in a performance statement.

Keywords

Accounting choice, Comprehensive income, Earnings management, Property-liability insurers

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