EQUITY VERSUS FAIR-MARKET-VALUE METHOD FOR THE CARRYING VALUE OF INVESTMENTS IN COMMON STOCK: A RESEARCH NOTE

Abstract

This study examines whether the equity or the fair-market-value method of accounting for investments produces higher values for the balance sheet and income statement. We gathered data on 517 companies listed in the Value Line Investment Survey (i.e., 30.6% of the approximately 1,690 listed companies) and conducted an analysis of the data. This research examined whether firms might choose one method over the other merely to present a better income statement rather than for economic reasons. Our analyses of the apparent differences between the two methods suggest that the equity method does not anticipate future earnings whereas the fair-market-value method consistently provides a higher estimate of value (i.e., less conservative) in up markets. Consequently, the data indicate that the equity method is the more conservative of the two methods of accounting for investments in the securities of other entities.