Other Comprehensive Income in a Residual Income Valuation Context -A practical approach to the impact of other comprehensive income for the residual income valuation model on the Swedish equity market

Sammanfattning: This study investigates the effect of other comprehensive income for equity valuation conducted with the residual income valuation model on the Swedish equity market. A pre-study is carried out to investigate whether the introduction of the revised IAS-1 Presentation of Financial Statements in 2009 resulted in a significant occurrence and magnitude of reported other comprehensive income for the companies listed on NASDAQ OMX Stockholm. Thereafter our main study investigates the effects of incorporation of other comprehensive income into the residual income valuation model - both in regards to the impact on the intrinsic value and how this stands in comparison to the market value. For the main study we undertake a practical approach, modeling for each company included in the sample. The study shows a significant occurrence of reported other comprehensive income on an aggregated level, as well as for two out of the five individual components, for our sample of 132 Swedish listed companies between the years 2009-2013. Further, the main study provides evidence of a significant impact on the intrinsic value when the aggregated value of other comprehensive income is incorporated into the residual income valuation model. Additionally, we find that when compared to the market value, either the original or the adjusted residual income valuation model provide the better estimate for both the aggregated other comprehensive income value as well as for one of the tested individual components. We cannot, however, identify which of the two, the original or the adjusted residual income valuation model, that provides the better estimate.