Evidence of the Relation between Accounting for Equity Investments and Equity Valuation

JOURNAL OF ACCOUNTING, AUDITING, AND FINANCE, Vol 11, No 4, Fall 1996

Posted: 18 Apr 1998

See all articles by Roger C. Graham

Roger C. Graham

Oregon State University

Craig E. Lefanowicz

University of Virginia - McIntire School of Commerce

Abstract

This study documents differences in the valuation of passive and nonpassive equity investments by correlating investor and investee security returns at investee dividend and earnings announcements. Accounting procedures for equity investments differ by the type of investment income recognized by investors. According to the revenue recognition rules of SFAS No. 115, investor firms with passive investments recognize investment income from investee dividends and some market value changes. According to the revenue recognition rules of APB Opinion No. 18, investors with nonpassive investments recognize investment income as investee income is earned. The correlations of investor and investee security returns suggest an association between passive and nonpassive investor valuation and investee dividend and earnings announcements that corresponds to the accounting revenue recognition procedures for equity investments. Analysis of the relative timing of investor and investee announcements indicates that the results are not due to a naive fixation on accounting revenue recognition events. Rather, the results suggest differences in the substance of the investor-investee relation between passive and nonpassive investments. The results are robust to alternative specifications and controls for relative investment size and industry affiliation.

JEL Classification: G12, M41, M44

Suggested Citation

Graham, Roger C. and Lefanowicz, Craig E., Evidence of the Relation between Accounting for Equity Investments and Equity Valuation. JOURNAL OF ACCOUNTING, AUDITING, AND FINANCE, Vol 11, No 4, Fall 1996, Available at SSRN: https://ssrn.com/abstract=2731

Roger C. Graham (Contact Author)

Oregon State University ( email )

424 Austen Hall
Corvallis, OR 97331
United States
541-737-4028 (Phone)
541-737-4890 (Fax)

Craig E. Lefanowicz

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-924-6356 (Phone)

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