Legislative Demands and Economic Realities: Company and Group Accounts Compared

Abstract

In a lot of countries, not only one but several sets of accounts have to be prepared and disclosed by (holding) companies. This paper inquires into possibly different economic functions of these sets of accounts by looking at the German dual financial reporting system, in which company (single) and group (consolidated) accounts have to be made public. Using a large number of accounting- and market-based metrics, we test whether single and group accounts display different properties and - if so - whether this finding can be explained by different economic roles played by both sets of accounts. Indeed, properties are found to largely differ. However, there is no evidence for single accounts being equally or more useful than group accounts in valuation and contracting or in other economic functions such as determining dividend policy or credit relevance. Moreover, single accounts also do not play an incremental role in fulfilling these functions. Our results indicate that the factual role of single accounts is to compute taxable income. We do not consider this as an economic function in its own right but a legal requirement that possibly can be achieved by less costly means than disclosing an own set of accounts following distinct accounting rules.

Keywords: consolidation, earnings quality, harmonization, company law, book-tax conformity

JEL Classification: G18, G32, G35, M41, M44, M47, D61, H25