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An Empirical Evaluation of Investment Income under the Equity Method of Accounting

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  • Cheng Lai
  • Jingjing Wu
  • Caihua Mo
  • Hua Zhou

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%.

Suggested Citation

  • Cheng Lai & Jingjing Wu & Caihua Mo & Hua Zhou, 2019. "An Empirical Evaluation of Investment Income under the Equity Method of Accounting," Australian Accounting Review, CPA Australia, vol. 29(2), pages 408-417, June.
    • Handle: RePEc:bla:ausact:v:29:y:2019:i:2:p:408-417
    DOI: 10.1111/auar.12214
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    Cited by:

    1. Michael E. Bradbury & Laura Mehnaz & Tom Scott, 2022. "The use and usefulness of equity accounting," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1957-1981, April.

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