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 empirical relation between accounting and investment/disinvestment responses to AASB 1024 is highlighted in the bottom panel. The ratio of non-disclosures to the sum of all changes in equity ownership exceeds .5 pre-adoption. Post-adoption, the ratio does not decline markedly. This result is expected because a non-disclosure must be maintained in order not to signal the economic significance of the non-disclosure.

The comparative significance of non-disclosures emerges again through the ratio of non-disclosures to consolidations. Pre-adoption, the ratio exceeds unity, suggesting that consolidation was a costly alternative for many companies. The sudden increase in this ratio in 1993 is merely an artifact of the decline in consolidations as AASB 1024 was fully implemented.

6. EMPIRICAL RESULTS

The test results for H1 through H5 are presented in Table III. The Mann-Whitney U-statistic tests whether paired groups are independent in terms of their central tendency. This is a non-parametric test that allows sample variances to assume any value. Where inequalities are correctly (incorrectly) signed a one-tail (two-tail) probability is reported.

Our findings may be summarized as follows. H1 receives empirical support. As argued, the mooted increase in leverage does not materialize, suggesting that firms were actively recontracting immediately prior to the commencement of AASB 1024. This is further evident in the tests of H2, H3 and H5. Disposals are evidently a viable alternative to consolidation because NCF disposal rates were significantly higher than both the post-adoption NCF disposal rate (H2) and the pre-adoption CF disposal rate (H3). The pre--versus post-adoption disposal rate for CF was examined to ensure that disposals were not recovery-driven. If they were, then both NCF and CF would exhibit a higher post-adoption disposal rate than the corresponding pre-adoption rate. Our results indicate that only CF have a higher post-adoption disposal rate than pre-adoption. The difference is significant at p=.038, using a Mann-Whitney U test (U=230, [n.sub.1]=[n.sub.2]=23). Of the two non-disclosure hypotheses, only H5 achieved statistical significance. The pre-adoption NCF non-disclosure rate is not significantly greater than the CF pre-adoption nondisclosure rate, but is significantly greater than the NCF post-adoption non-disclosure rate.

7. CONCLUSION

Firms are found to have reported fewer controlled associates post-adoption than pre-adoption, reflecting the compliance consequences of AASB 1024. The fact that post-adoption leverage did not increase suggests that consolidated controlled associates had debt levels similar to the group. The disclosure costs of these CF were therefore presumably not high. There is also a likelihood that these firms had previously disclosed their off-balance sheet obligations in other ways, but this proposition is not testable. The implication is that the higher debt levels of controlled associates of NCF were not fully known in the debt market, else the firms would have consolidated. Disposals for NCF were a major response mechanism to AASB 1024. This suggests the costs of restructuring investment portfolios are less than the costs of disclosing off-balance sheet debt. There is evidence that non-disclosures are another significant mechanism used by NCF to avoid consolidation. Little evidence is found of a systematic relationship between non-disclosure and disposal rates for either CF or NCF.