Is the relation between non-controlling interests and parent companies misleading?. Issue 1 (February 2021)

• Record Type: Journal Article
• Authors: Lopes, Ana Isabel; Lourenço, Isabel Costa; Soliman, Mark T; Branco, Manuel Castelo
• Is Part Of: Australian journal of management. Volume 46:Issue 1(2021)
• Page Start: 24
• Page End: 50
• Publication Date: 2021-02
• Subjects: Institutional characteristics -- investor protection -- legal origin -- non-controlling interests -- parent companies -- value relevance; Management -- Periodicals; Management -- Australia -- Periodicals; Business enterprises -- Finance -- Periodicals; Industrial management -- Australia -- Periodicals; 330
• DOI: 10.1177/0312896219896388
• Languages: English
• ISSNs: 0312-8962

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