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Value Relevance Of Group Financial Statements Based On Entity Versus Parent Company Theory: Evidence From The Largest Three European Capital Markets

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  • Muller Victor-Octavian

    (Babes-Bolyai University, Faculty of Economics and Business Administration, Cluj-Napoca, Romania)

Abstract

Financial statements’ main objective is to give information on the financial position, performance and changes in financial position of the reporting entity, which is useful to investors and other users in making economic decisions. In order to be useful, financial information needs to be relevant to the decision-making process of users in general, and investors in particular. Regarding consolidated financial statements, the accounting theory knows four perspectives (theories) on which the preparation of those statements is based, namely, the proprietary theory, the parent company theory, the parent company extension theory and the entity theory (Baxter and Spinney, 1975). Of practical importance are especially the parent company extension perspective and the entity perspective. The IASB and FASB decided (within an ED regarding the Improvement of the Conceptual Framework) that consolidated financial statements should be presented from the perspective of the group entity, and not from the perspective of the parent-company. However, this support for the entity theory is to our knowledge not backed by empirical findings in the academic literature. Therefore, in our paper we set to contribute with empirical arguments to finding an actual answer to the question about the superior market value relevance of one of the two concurrent perspectives (theories). We set to carry out an empirical association study on the problem of market value relevance of consolidated financial statements based on the entity theory respectively on the parent company (extension) theory, searching for an answer to the above question. In this sense, we pursued an analysis of market value relevance of consolidated accounting information (based on the two perspectives) of listed entities between 2003-2008 on the largest three European Stock Exchanges (London, Paris and Frankfurt). The obtained results showed that a „restrained” entity perspective, which would combine elements of entity theory (by focusing on the whole group equity) and elements of parent company extension theory (by focusing on income corresponding to majority interest), would have a superior relevance compared to the classical versions of the two mentioned perspectives.

Suggested Citation

  • Muller Victor-Octavian, 2012. "Value Relevance Of Group Financial Statements Based On Entity Versus Parent Company Theory: Evidence From The Largest Three European Capital Markets," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 949-955, July.
    • Handle: RePEc:ora:journl:v:1:y:2012:i:1:p:949-955
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    References listed on IDEAS

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    1. Harris, Ts & Lang, M & Moller, Hp, 1994. "The Value Relevance Of German Accounting Measures - An Empirical-Analysis," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 187-209.
    2. Goncharov, Igor & Werner, Joerg R. & Zimmermann, Jochen, 2009. "Legislative demands and economic realities: Company and group accounts compared," The International Journal of Accounting, Elsevier, vol. 44(4), pages 334-362, December.
    3. Francis, J & Schipper, K, 1999. "Have financial statements lost their relevance?," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 319-352.
    4. Katerina Hellstrom, 2006. "The Value Relevance of Financial Accounting Information in a Transition Economy: The Case of the Czech Republic," European Accounting Review, Taylor & Francis Journals, vol. 15(3), pages 325-349.
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    More about this item

    Keywords

    Consolidated Financial Statements; Entity Theory; Parent Company Theory; European Capital Market; Market Value Relevance;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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