Abstract
One of the most critical decisions top management in corporate groups has to make is the allocation of resources among competing investment opportunities across the group. Information asymmetry between the parent and subsidiaries, however, creates agency conflicts that complicate such allocation. Exploiting the adoption of more rigorous, international accounting standards by UK subsidiaries, we examine whether accounting information can mitigate these agency costs. We find that adopting subsidiaries have greater cash holdings, receive more group borrowings and pay less dividends. These findings are consistent with accounting effecting agency costs of excess cash. Further, we find that adopting subsidiaries have greater (lower) capital expenditures when in growing (declining) industries and invest more in innovation.
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