The Value Relevance of Equity Method Fair Value Disclosures

Abstract

We assess the valuation implications of the fair value disclosures made for publicly traded securities accounted for under the equity method. We test the association between investors' stock price metrics and fair value disclosures while controlling for book values on a sample of 172 investor firm-years during 1993-1997. Our results indicate that the information in the fair value disclosures is incremental to the information provided by both an investment's equity method book value and equity method reported income. This suggests that there is nothing unique about investments in publicly traded common stock that involve significant influence that makes the fair value disclosures irrelevant for firm valuation. Copyright Blackwell Publishers Ltd, 2003.

The value-relevance of disclosed summarised financial information of listed associates

“…However, as Australia only adopted equity accounting from 1998 onwards (Nobes, 2002) these carrying amounts were the cost of the associates. Graham, Lefanowicz and Petroni (2003) consider equity accounted carrying amounts of listed associates and find that the equity accounted carrying amounts as well as the difference between their disclosed fair values and equity accounted carrying amounts are value-relevant. Importantly, Graham, Lefanowicz and Petroni (2003) exclude only financial services firms from their sample, which suggests that disclosed fair values are value-relevant for diverse industries.…”

“…For example, Graham, Lefanowicz and Petroni (2003) find that the difference between disclosed fair values and equity accounted carrying amounts of listed associates is value-relevant. Richardson et al (2012) conclude that liability disclosures of equity accounted joint ventures are value-relevant for a sample of Canadian joint ventures.…”

Risk Implications of Increased Off-Balance Sheet Disclosure: The Case of FIN 46 and SOX

“…Other evidence indicates that disclosed amounts augmenting financial statement reporting impact market participant assessment of risk (e.g. Barth, Beaver, and Landsman, 1996;Graham, Lefanowica, and Petroni, 2003). Similar findings also exist relating to detailed descriptions about potential losses (Koonce, McAnnally, and Mercer, 2005).…”

“…For instance, Barth, et al (1996) shows this effect for fair value disclosures regarding loan losses as does Graham et al (2003) for fair value disclosures related to equity method investments. Further, Koonce, McAnnally, and Mercer.…”

Value Relevance of Embedded Value and IFRS 4 Insurance Contracts

“…6 See CFO Forum (2004, 2008; Campbell (2002);and Duverne and Le Douit (2007) for the increasing use of embedded value model. Graham et al (2003) and Klumpes (2005) provide the reasons. These results contribute to the literature on fair value accounting.…”