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An Empirical Evaluation of Investment Income under the Equity Method of Accounting
Author(s) -
Lai Cheng,
Wu Jingjing,
Mo Caihua,
Zhou Hua
Publication year - 2019
Publication title -
australian accounting review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.551
H-Index - 36
eISSN - 1835-2561
pISSN - 1035-6908
DOI - 10.1111/auar.12214
Subject(s) - earnings , earnings response coefficient , equity (law) , accounting , return on equity , business , post earnings announcement drift , valuation (finance) , equity capital markets , earnings per share , economics , financial economics , finance , stock exchange , political science , law
Abstract This study investigates the valuation implications of equity method earnings among Chinese listed firms, which are often perceived by the Chinese business press of employing the equity method to avoid reported losses. Our results show that firms with declining core earnings are more likely to have equity method investments than firms with increasing core earnings. Also, firms with lower core earnings report higher equity method earnings. Moreover, equity method earnings do not improve earnings persistence but are found to be relevant. Investors act as if they naively fixate on equity method earnings. A portfolio constructed on the basis of core earnings and equity method earnings generates a hedged return of 8%.