An empirical examination of the value relevance of consolidated earnings figures under a cost of acquisition regime

This study examined empirically the value relevance of, first, the total reported consolidated accounting earnings and, secondly, the earnings of the subsidiaries attributed to the parent company, under a cost of acquisition regime, via an association study. Various alternative models were formed and tested empirically against data obtained from the Athens Stock Exchange for the years 1993, 1994 and 1995. It was found that, when undeflated, total reported consolidated earnings were value relevant but to a lesser degree than the total reported earnings of the parent company, probably because they are the sum of a set of heterogeneous earnings components. Similarly, consolidation did not improve the explanatory power of the valuation models. However, decomposition of the total reported consolidated earnings into the part contributed by the parent company and the part contributed by the subsidiaries (excess group earnings), in order to account for the different legal (and tax) status of these two earnings components provided two earnings measures with different degree of value relevance, thus verifying expectations.