An Empirical Study of the Value-Relevance of Using Proportionate Consolidation Accounting for Investments in Joint Ventures

Posted: 20 Nov 2007

See all articles by Ronald L. Stoltzfus

Ronald L. Stoltzfus

Eastern Mennonite University; York College of Pennsylvania

Ruth W. Epps

Virginia Commonwealth University - Department of Accounting

Abstract

This research examines bond risk premiums to determine whether creditors of companies with investments in joint ventures reflect legal or implicit measures of the debts of joint ventures. The legal view suggests that the amount of potential loss from an investment in a joint venture is limited to the investment. The implicit view suggests that the operations of the joint venture and the venturer are interdependent. Equity method accounting reflects the legal view and proportionate consolidation reflects the implicit view. The study shows that approximately half of equity investments represent investments in joint ventures. Furthermore, the average joint venture uses debt to finance about two thirds of the assets. The results show that proportionate consolidation fails to improve the explanatory power of the model when examining the entire set of companies that invest in joint ventures. However, the data reject the null hypothesis of no improvement with proportionate consolidation when examining companies who guarantee the debt of their joint venture. The policy implication of this study indicates that a change to proportionate consolidation would provide more value-relevant information to creditors when companies guarantee the debt of the joint venture.

Keywords: Investments, Joint ventures, Proportionate consolidation accounting, Value-relevance

Suggested Citation

Stoltzfus, Ronald L. and Stoltzfus, Ronald L. and Epps, Ruth W., An Empirical Study of the Value-Relevance of Using Proportionate Consolidation Accounting for Investments in Joint Ventures. Accounting Forum, Vol. 29, No. 2, pp. 169-190, 2005, Available at SSRN: https://ssrn.com/abstract=1031306

Ronald L. Stoltzfus

Eastern Mennonite University ( email )

1200 Park Road
Harrisonburg, VA 22802
United States

York College of Pennsylvania ( email )

York, PA 17405-7199
United States

Ruth W. Epps (Contact Author)

Virginia Commonwealth University - Department of Accounting ( email )

301 W Main Street
Richmond, VA 23284-4000
United States

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