Testing Value Relevance of Non-Controlling Interests: Evidence with European Countries

Abstract

Driven by the recent interest of researchers in Non-Controlling Interests (NCI), this paper seeks to analyze the influence that this hybrid equity element has on the corporate market value. We examine whether the relation of NCI with corporate market prices is conditioned by the institutional environment where the parent company is located. Since the variable NCI is only reported when parent companies engage in business combinations throughout partial acquisitions, in a first stage we have a sample of 4,850 observations from 5 European countries. Only 2,060 observations entered in the second stage, namely those reporting NCI for three consecutive years. Holding accounting standards constant, and controlling for firm characteristics, we find a positive (negative) association between NCI and the value of parent company shares in European countries whose institutional characteristics support weaker (stronger) investor protection. Because findings in the scarce prior literature on this topic are mixed, our results provides useful justifications for diversity and insights for future empirical researchers, namely those related with the impacts of the effect of measurement of NCI based on the option for full goodwill method.