The Relationship between Subsidiary''s Liability and Parent Company''s Financial Risk, Market Value, and Systematic Risk: Research of Consolidated Financial Statements Information Value
Date Issued
2009
Date
2009
Author(s)
Fang, Wei-Lian
Abstract
Contrast to parent company’s stand-alone financial statements, which only disclose parent company’s own liability, consolidated financial statements sum up the liabilities of parent company and subsidiary. This research examines the relationship between subsidiary’s liability and parent company’s financial risk, market value, and systematic risk to find whether the parent company controls the financing activity of subsidiary, and whether the subsidiary’s debt has the meaning of liability as parent company’s debt. The purpose is to realize the information value of consolidated financial statements, prepared on the point of economic entity. irst, if the parent company’s financial risk (by capital structure, short-term debt resolution and profit) is higher, and given that financial instruments take the legal individual as an decision unit, whether the possibility of using the subsidiary company to get a loan is higher. In view of 391 sample companies, from 2000 to 2006, the empirical results of correlation and regression analysis demonstrate that the subsidiary’s debt is related to the parent company financial risk measures. The implication is that: the financing decision of subsidiary reflects the enterprise overall goal. In this situation, the disclosures of consolidated financial statements conform to the complete picture of the enterprise financing situation. ext, if the investor considers the subsidiary as an independent individual, then the subsidiary’s debt would not be considered in the parent’s stock price; otherwise if the subsidiary is regarded as part of the enterprise, then the subsidiary’s debt will be valued like the debt of parent company. In view of 227 sample companies, from 2001 to 2006, by implementing Ohlson valuation model, the findings are: (1) the Subsidiaries’ debt is negatively associated with the narket value of parent company. Besides, the valuation coefficient of subsidiary’s debt is statistically insignificantly different that of parent’s debt; (2) 2005 consolidation scope change does not decrease the relevance of subsidiary’s debt. hird, on the discussion of the leverage risk meaning of subsidiary’s debt, by using the theoretical model constructed on the enterprise systematic risk, the research examines the significance of the subsidiary’s debt on the systematic risk, and compares it to that of the parent’s debt. The sample consists of three groups of 906, 728 and 576 observations, according to the estimation periods of accounting systematic risk of 32, 40 and 48 seasons, from 2000 to 2006. The empirical results show that: (1) By Vuong tests, the consolidated debt, including subsidiary’s debt, has more explanatory power than the parent’s debt on the systematic risk of parent’s; (2) The 2005 expansion of the scope of consolidated financial statements does not reduce the information relevance of subsidiary’s debt. hese findings imply that from the point of view of investors, the debt of subsidiary and the debt of parent are both the liabilities of consolidated entity. Furthermore, consolidated financial statements, prepared on the basis of substantial control power, could fully present the financial condition of the economic entity and enhances the transparency of financial information. The research might provide some evidence to the fully consolidation principles of International Accounting Standards（IAS）.
Subjects
Consolidated entity
Parent company
Subsidiary
Consolidated financial statements
Substantive control power
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