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Is the relation between non-controlling interests and parent companies misleading?

Author

Listed:
  • Ana Isabel Lopes
  • Isabel Costa Lourenço

    (Business Research Unit (BRU-IUL), ISCTE-IUL Instituto Universitário de Lisboa, Lisboa, Portugal)

  • Mark T Soliman

    (USC Marshall School of Business, University of Southern California, Los Angeles, CA, USA)

  • Manuel Castelo Branco

    (Faculty of Economics, University of Porto, CEF.UP and OBEGEF, Porto, Portugal)

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

Suggested Citation

  • Ana Isabel Lopes & Isabel Costa Lourenço & Mark T Soliman & Manuel Castelo Branco, 2021. "Is the relation between non-controlling interests and parent companies misleading?," Australian Journal of Management, Australian School of Business, vol. 46(1), pages 24-50, February.
    • Handle: RePEc:sae:ausman:v:46:y:2021:i:1:p:24-50
    DOI: 10.1177/0312896219896388
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    More about this item

    Keywords

    Institutional characteristics; investor protection; legal origin; non-controlling interests; parent companies; value relevance;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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