Valuation of Partially-Controlled Investments
49 Pages Posted: 5 Jul 2005
Date Written: June 2005
Abstract
This paper contrasts the valuation of accounting numbers related to two classes of assets - the internally managed, fully-controlled assets versus the "significant influence" investments, that is, investments where the investing firm exercises influence, but not control, over the assets. We find that the earnings stream from partially-controlled investments, despite the purported growth potential of these investments, is valued significantly less than controlled earnings. We show that it is primarily the greater probability of adaptation for these assets and the use of these assets for off-balance sheet financing purposes that makes investors discount this earnings component. We also find that book value plays a more salient valuation role for partially-controlled investments than it does for controlled investments. Finally, we find that the valuation of earnings and book value of the partially-controlled segment is more sensitive to overall firm health than the valuation of the controlled segment.
Keywords: Control, valuation, segments, joint venture, firm boundary
JEL Classification: G12, G33, M41, L23, L22
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Valuation of the Foreign Income of U.S. Multinational Firms: A Growth Opportunities Perspective
By Gordon M. Bodnar and Joseph Weintrop
-
The Valuation of the Foreign Income of U.S. Multinational Firms: A Growth Opportunities Perspective
By Gordon M. Bodnar and Joseph Weintrop
-
A Test of the Market’s Mispricing of Domestic and Foreign Earnings
-
Managerial Empire Building and Firm Disclosure
By Ole-kristian Hope and Wayne B. Thomas
-
Domestic and Foreign Earnings, Stock Return Variability, and the Impact of Investor Sophistication
By Jeffrey L. Callen, Ole-kristian Hope, ...
-
The Valuation of Domestic and Foreign Earnings and the Impact of Investor Sophistication
By Jeffrey L. Callen, Ole-kristian Hope, ...
-
A Review of Markets-Based International Accounting Research
By Gary K. Meek and Wayne B. Thomas