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

The large increase in the number of subsidiaries in 1992 presumably reflects the impact of the standard, but the absolute increase of 1705 far exceeds the decline of 41 in the number of controlled associates. The jump in subsidiaries possibly also reflects the emergence of the Australian economy from deep recession in 1992, but the fall in 1993 appears counter-intuitive. The drop in 1993 was caused by an ongoing high rate of voluntary liquidations combined with a sharp decline in corporate acquisitions. Both reflect efficient refocusing: asset restructuring was essentially completed as the recovery began.

For interpreting the ratio trends, median statistics are preferred because they are less affected by outliers than the mean values. Although the ratio of controlled associates to all associates is reasonably stable, associates, controlled associates and IJVs all show a secular decline in relation to the use of subsidiaries. On average, the decline is strongest in 1992. Trends in firm leverage are less clear because trends in the mean and median values of TL/TA and interest coverage are often opposing. The interest coverage ratio is defined as the ratio of earnings before abnormals, interest and tax (EBIT) to interest payments. In 1992, the year of the change, TL/TA appears to increase slightly. There is a strong suggestion that the controlled associates were not debt-laden, for Selling, Sondhi and Sorter (1989) report a mean increase in leverage of 92.7% when finance subsidiaries were consolidated pursuant to SFAS 94.

Table III indicates the dispositions of controlled associates around the introduction of AASB 1024. Dispositions comprise either transactions or reclassifications. Raw counts are difficult to interpret because there is no normalization for systematic differences between the corporate structures of CF and NCF. To adjust for this, the counts are divided by the number of total entities, which is the sum of subsidiaries and all associates (whether controlled or not) in a given year. In aggregate, this measure is unaffected by conversions to subsidiaries or IJVs, but is understated when disposals or liquidations of controlled associates occur. However, since the latter dispositions are minor relative to the numbers of subsidiaries, any induced bias should be very small.

Table II indicates that the structure of raw counts remains approximately intact when observed numbers are normalized by the total number of entities comprising the firm. Several empirical regularities emerge. The first is that consolidations dominate all non-consolidation in 1992, as expected. This outcome does not obtain in either 1991 or 1993. Second, sell-offs are on average the most common form of non-consolidation, particularly in 1991 and 1993. Third, conversions to IJVs and sell-downs are relatively minor in all three years. Fourth, liquidations peak in 1992. This is possibly attributable to firms' restructuring as they emerge from the recession. Finally, non-disclosed dispositions are the second-ranking non-consolidation in 1991 and 1993, and equal-highest in 1992. This latter group represents full non-disclosure of data relating to controlled associates. Presumably, the high rate of non-disclosure in 1991 was in anticipation of AASB 1024.