Equity Versus Fair Market Value Method for the Carrying Value of Investments in Common Stock : A Research Note

This study examines whether either 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 initial analysis of the data. This research examined whether firms might choose one method rather than the other merely to present a better income statement rather than for economic reasons. The differences apparent 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 the equity method is a more conservative of the two methods