Corporate responses to the introduction of the Australian consolidation standard: a test of disclosure cost explanations

Journal of the Academy of Business and Economics, Feb, 2003 by Jean M. Canil, Bruce A. Rosser

Since a natural consequence of adoption of AASB 1024 is increased post- versus pre-adoption disclosed leverage, unchanged leverage around the time of adoption is construed as evidence that firms restructure or recontract to mitigate the disclosure costs of the Standard. Ceteris paribus, the first hypothesis may be stated:

H1: For a given firm, pre-adoption and post-adoption leverage are the same.

Firms avoid consolidation by disposing of the controlled associate(s) when the disclosure costs mandated by AASB 1024 are too costly. Hence, the pre-adoption disposal rate for non-consolidating firms (NCF) is hypothesized higher than their post-adoption rate and the pre-adoption disposal rate for firms consolidating their controlled associates (CF). The observed disposal rate is adjusted for concurrent disposals of subsidiaries to form a relative disposal rate. This is necessary because transactions in associates could be driven by economic opportunities that are common to subsidiaries as well. Specifically, disposals are more likely in prosperity than recession, so observation of more disposals of controlled associates than subsidiaries in 1992 (a recession year) implies an economic consequence of AASB 1024:

H2: NCF have a higher relative disposal rate pre-adoption than post-adoption.

H3: NCF have a higher relative disposal rate pre-adoption than the corresponding rate for CF.

When disposal of a controlled associate is not optimal, an alternative option is not to disclose publicly the controlled associate. This option is most valuable when there are multiple lenders because private disclosures to individual lenders can be made without public disclosure. Public non-disclosure of controlled associates' financial data is more likely when the costs of consolidation are high. Hence, NCF are hypothesized to have higher non-disclosure rates than CF. By corollary, NCF have a higher relative non-disclosure rate pre-adoption than post-adoption.

H4: Pre-adoption, NCF have a higher relative non-disclosure rate than CF.

H5: NCF have a higher relative non-disclosure rate pre-adoption than post-adoption.

4. SAMPLE AND MEASURES

The largest 500 industrially listed Australian companies (firms) by market capitalization were sampled randomly for companies having (a) at least one associate entity, or (b) one or more unconsolidated investments with ownership levels over 50 per cent, in 1990 or 1991. Mining and industrial companies with major activities in the extractive industries were excluded because these industries frequently use joint ventures that make identification of controlled associates difficult, especially at 50% ownership. Foreign companies and banks were also excluded, the latter because of their uniquely high debt levels. This procedure yielded a sample of 40 firms. A given firm could have one or more controlled associates at any point, and this produced 63 useable observations. The companies selected are listed in the Appendix.

Since AASB 1024 remained ungazetted until the Corporations Law was made consistent in June, 1991, so pre-adoption responses are examined over a two-year window before the first set of financial statements to which AASB 1024 applied. Thus, pre-adoption sell-offs, sell-downs and conversions to IJVs &c. are measured across 1991 and 1992. The pre-adoption number of controlled associates is measured at 1990 financial year-ends because the lead time for the standard was long, which favored anticipation. The post-adoption number of controlled associates is measured at 1992 financial year-ends. Acquisitions were not counted, even if an acquired controlled associate was sold soon after acquisition. Such sell-offs are not attributable to AASB 1024, but if part of an asset restructuring programme, these sell-offs should be related to those of subsidiaries, which can be measured. Leverage is measured by the ratio of total liabilities to total assets (TL/TA). Pre- and post-adoption debt levels are measured at 1991 and 1992 financial year-ends, respectively.