Minority Stockholder Information Relevance: Wealth Effects And/or Monitoring?
2010; Allied Academies; Volume: 14; Issue: 4 Linguagem: Inglês
ISSN
1096-3685
Autores Tópico(s)Financial Reporting and Valuation Research
ResumoINTRODUCTION In FASB 160 which becomes effective on January 1, 2009, the Financial Accounting Standards Board (FASB 2007) mandates a presentation of NCI information separately on the income statement and within stockholders' equity on the balance sheet. Is FASB's approach relevant for investors (Rapoport, 2009)? The relevance of accounting information for investors is a fundamental precept of FASB's Statement of Financial Concepts No. 2 (1980), but relevance is not guaranteed for any specific standard. Only an empirical investigation will provide evidence about the relevance of NCI information for the stock market. Therefore, this research examines the testable proposition: Does disaggregated majority and minority shareholder interests' data provide incremental monitoring/wealth-sharing information to investors above and beyond ignoring the NCI financial statement numbers? In order to get a good assessment of the investor response to NCI information, this analysis also examines a complementary question: Does the presence of NCIs impact investor reactions according to the level of income (profits/losses and unexpected positive/negative income)? This study provides a benchmark of information content about a period prior to the adoption of FASB 160 so that accountants can have a comparative sense about the expectations of investors with respect to NCI data in the financial statements. The consolidation process is a key accounting activity in many large firms, but there is limited empirical analysis of what investors think about this process (Clark 1993). In the current study, there are millions of dollars and numerous firms (approximately a fifth of this study's NYSE and AMEX sample) involved. In order to examine the relevance of NCIs, it will be necessary to utilize a valuation model that facilitates the analysis of distinct NCI incremental information. This approach gives an opportunity to examine shareholder monitoring and wealth-sharing in the accounting context that firms with NCIs provide as contrasted with Graham and Lefanowicz (1999) who focused only on balance sheet wealth effects. Thus, as the current study expands the knowledge of shareholder governance of an issue, the findings will also contribute knowledge about price-earnings relations because most researchers pool earnings data to estimate the cross-sectional impact on the stock market presuming a homogeneous relation (Collins, Pincus and Xie 1999) (CPX). Improving the ability to explain the relevance of NCI to investors and the academic community is another motivating factor. This research specifically arose from a classroom question for which there was no empirical evidence (ex ante the current study) about the relative importance of NCIs under different firm conditions. The empirical results indicate that NCI information is relevant to investors both from a monitoring and wealth-sharing perspective. The results contribute knowledge by showing that NCIs do provide incrementally higher monitoring value on income information, but not for the largest firms. In addition, the wealth-sharing and monitoring effects are different depending upon whether the firm experienced a profit or loss. A separate analysis on the impact of unexpected earnings also has differentiable implications from NCIs. The differential findings are consistent with utility and prospect theory. Thus, a theoretical foundation and testing are given for an aspect of shareholder partnering and the study provides a useful contribution toward the knowledge of modern corporation combination issues. The paper organization is as follows: The next section presents theory and gives a literature review. The following section describes the sample description and gives simple statistics comparing firms with and without NCIs. The next section contains the empirical analysis. The final section presents the conclusions. THEORY AND LITERATURE REVIEW Theoretically, the potential difference between firms with NCIs and those without can be distinguished by considering a two-firm example comparison. …
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