Abstract
This article investigates whether different levels of investor protection affect the equity market’s valuation of non-controlling interests (NCIs) in a consolidated corporate entity. Using a set of publicly listed European firms, our findings suggest a positive (negative) association of NCIs with parent companies’ share prices in countries with low (high) levels of investor protection. We interpret the findings as evidence that when non-controlling investors are not well-protected, parent companies have an opportunity to extract rents from non-controlling owners, leading to a positive valuation of NCIs’ equity. However, in countries where non-controlling investors are well-protected, parent companies are not able to extract rents but still must monitor and govern the related subsidiary; thus, NCIs become a net cost, and the relation inverts. JEL Classification: M41, M48
Highlights
Prior literature on the value relevance of non-controlling interests (NCIs) has primarily focused on single-country settings and has yielded conflicting results
We find a positive relationship between reported NCIs and the value of parent companies’ shares in countries in which the institutional characteristics favour weaker investor protection
The coefficient on the interaction for countries with high investor protection (HIGHxNCI) is negative and statistically significant (α7 = -0.806; p-value < 0.05), which means that the variable NCI impacts differently on market value per share (MV), depending on whether the dummy HIGH equals 1 or 0
Summary
Prior literature on the value relevance of non-controlling interests (NCIs) has primarily focused on single-country settings and has yielded conflicting results. The market value of NCIs could be affected, in part, by minority shareholder protection in the country and whether the law affords these shareholders protection from rent extraction. This country level of minority shareholder protection could influence how investors value a less-than-wholly-owned subsidiary. It is reasonable that shareholder protection laws in an individual country could influence the valuation of the parent company. This protection determines the amount of rents that the parent company can extract from the minority shareholders and pass on to the parent company’s shareholders. We suggest that the differences in NCI valuation documented by the prior literature could be driven by differences in country-level investor protection and law enforcement
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