Valuation of Partially-Controlled Investments

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