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

Cheng Lai, Jingjing Wu, Caihua Mo and Hua Zhou

Australian Accounting Review, 2019, vol. 29, issue 2, 408-417

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%.

Date: 2019
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