Corporate responses to the introduction of the Australian consolidation standard: a test of disclosure cost explanations.

ABSTRACT

AASB 1024 was introduced to mandate consolidation of controlled associates, and hence disclosure of debt issued by these associates. Firms with debt-laden controlled associates faced significant disclosure costs, so therefore had an incentive to avoid consolidation. Disclosure cost arguments are used to generate hypotheses in relation to pre- and post-adoption investment structures. Corporate sell-offs and straight non-disclosure of controlled associates are found to have been significant mechanisms for reducing the impact of the disclosure provisions of AASB 1024.

1. INTRODUCTION

Watts and Zimmerman (1986, ch.12) argue that mandatory changes in accounting method present a more powerful test of contracting hypotheses than voluntary method changes because mandated changes can force costly recontracting. Mandated changes can impose costs on firms by causing renegotiation of debt, manager compensation or implicit political contracts to restore managers' original preferred outcomes. Stock price decrements are therefore expected for firms whose pre-existing set of contracts are materially affected.

Several studies of the economic consequences of mandated accounting changes have been reported, notably those by Leftwich (1981), who examines the impact of restricting application of the pooling-of-interests method for business combinations, and Collins, Rozeff & Dhaliwal (1981) who, together with Lys (1984), analyze the impact of elimination of the full-cost method of accounting for exploration costs. All examine the impact of the mandated change on debt covenants. This paper examines the disclosure consequences of AASB 1024 that mandated consolidation (and hence disclosure) of hitherto non-consolidated investments in controlled associates.

Prior to AASB 1024, controlled associates were often employed to hold debt off the consolidated balance sheet. Haddon (1992, pp.64-66) describes how the Adelaide Steamship/David Jones group, which ran up accumulated debts of $7 billion, was characterized by a network of cross-holdings at or just below the 50% level which enabled the group to avoid consolidation of debt-laden controlled associates. Hence, firms that had already issued significant debt through non-consolidated associates potentially faced the highest recontracting costs to maintain their non-disclosure, so are expected to have the most incentive to alter their investment/financing policies in anticipation of the introduction of AASB 1024. The disclosure provisions of AASB 1024 can be avoided by restructuring the firm's investment portfolio such that the levels of equity ownership are altered to avoid these provisions. However, portfolio restructuring is not only costly, but may also signal the high debt level that the restructuring was possibly designed to conceal. In short, the higher (lower) are the disclosure costs induced by AASB 1024; portfolio restructuring is (is not) expected.

We document the empirical relation between investment/disinvestment decisions and accounting disclosure choices, and test hypothesized relationships between pre- and post-adoption disclosure choices. Firms with pre-existing debt issued by controlled associates could have followed any one of several alternative responses either to avoid or accommodate the impact of AASB 1024. Avoidance can be affected by investment/disinvestment decisions that change the degree of equity ownership in order to convert the associate to an incorporated joint venture, or sell-down, sell-off or liquidate the investment. Alternative accounting disclosure choices comprise straight non-disclosure of controlled associates, or non-compliance by not consolidating a controlled associate. Evidence of significant pre-adoption sell-off activity relative to the post-adoption period, and post-adoption non-disclosure relative to the pre-adoption period, is presented. Thus, full disinvestments in tandem with straight non-disclosures are the major observed choices. This result implies that investment/disinvestment decisions and accounting policy choices are substitute mechanisms in firms' establishment of new corporate structures consequent (and often in anticipation of) the introduction of AASB 1024.

The plan of the paper is as follows. Section 2 reviews the regulatory changes surrounding AASB 1024. The hypotheses are formulated in section 3. The sample construction and measures are described in section 4. Descriptive statistics are presented in section 5, and tests in section 6 indicate the evidence is consistent with the hypothesis that the costs of restructuring investment portfolios are less than the disclosure costs imposed by AASB 1024, indicating that mandatory changes in regulation can cause firms to alter their financing and operating policies. Section 7 concludes the paper.

2. THE REGULATORY CHANGES

Prior to AASB 1024: Consolidated Accounts, a controlled associate was consolidated when the firm, directly or indirectly, owned 50% or more of the voting shares. Under this regime, it was possible for corporate structures to be created allowing firms with debt-laden subsidiaries to hold less than 50% of the voting shares while simultaneously retaining control. AASB 1024 (Para. 9) defines control as "the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlled associate". The investment is classified as an associate entity and by virtue of AASB 1016 only the net carrying amount of the associate is disclosed by the firm or investor.

Following revision of the Corporations Law in July 1991, AASB 1024 became effective from 31 December 1991. AASB 1024 tackled the off-balance sheet financing problem in two ways. First, it required consolidation of the accounts of parent and subsidiaries. Subsidiaries are defined to include unincorporated firms such as partnerships and unit trusts. Under the former Companies Code, subsidiaries were defined to include companies only. Hence, unincorporated firms (such as partnerships and unit trusts) that were previously used for off-balance sheet financing are required to be consolidated. Second, and of more practical significance, AASB 1024 substituted a broader definition of control to include the capacity to exercise control. Consolidation has two salient effects. First, although the debt levels of individual controlled investments are not disclosed, the incremental effect on the total debt of the firm can be observed. Second, consolidation potentially adds information through elimination of intercompany balances and the profit/loss on intercompany transactions. When associates are reported separately, this information is withheld from investors, who then face higher information costs in ascertaining true debt levels and the value of their collateral.

Mian and Smith (1990) argue that information costs for investors should be lower when two unconsolidated sets of accounts are externally consolidated, than when a consolidated set of accounts is deconsolidated. The reason is that comparatively more extra information is needed to deconsolidate than to consolidate. For example, deconsolidation of a finance controlled-entity requires knowledge of the margins on the financing component of the operating entity's sales, plus information on intra-group debt balances. This perspective is qualified in the present context because associate companies financial statements (if accessible) are not prepared on the same basis as the one-line disclosure of associates' results in the investors' books, which is equity-accounted. Once controlled associates' results are consolidated, the cost method is adopted.

Incorporated joint ventures (IJVs) are accounted for in the same way as share investments generally. Two further possibilities are voluntary liquidation of the associate, and complete non-disclosure of an associate's existence. Voluntary liquidations (effected by virtue of control) are not an option because these imply solvency, in which case compliance is not costly from a borrowing perspective. Similarly, complete non-disclosure is not expected when disclosure was made in the previous year because subsequent non-disclosure may imply more bad news than would be revealed through compliance. The joint venture is incorporated because both parties own shares in a controlling entity, typically in the range 33-50 percent, although smaller percentages are possible. In cases of financial distress, lenders may opt to subscribe for share capital in satisfaction of their debt claim. When control over the decisions of another entity is not implied, the interest in the joint venture is equity-accounted. Equity interests of exactly 50.0 per cent imply joint control, which is not control in terms of AASB 1024 (para. 9). The same treatment is applied for lower percentage interests, as long as control is not present. Unincorporated joint ventures are proportionately consolidated, with the result that a portion of the liabilities of the investee is consolidated. Note that 50.0 per cent investments are not exclusively joint ventures, i.e., they can represent controlled associates, but an exact 50.0 percent ownership implies joint ownership one (or possibly more) other shareholder(s).

3. HYPOTHESIS FORMATION

The revised definition of control in AASB 1024 imposes potentially significant disclosure costs on firms with outstanding debt issued in the name of controlled associates before the new Standard was introduced. Debt disclosure not only increases future borrowing costs, but also renders future disclosures in general less credible, which is also costly to managers and hence shareholders. Moreover, AASB 1024 was introduced during a sharp recession in the Australian economy. At this time, debt levels should have been high because declining earnings had eroded asset values. Introduction of AASB 1024 should therefore result in higher post-adoption firm leverage when debt-laden controlled associates are consolidated. The number of controlled associates is not relevant because significant debt can be issued in the name of a single controlled associate. Given depressed asset values, the disclosure costs of AASB 1024 requiring true debt levels to be disclosed should therefore have been higher than usual.

In general, disclosure of controlled associates' debt is made whenever it is in shareholders' interest to do so. For example, if disclosure of off-balance sheet liabilities increases bankruptcy costs borne by shareholders, non-disclosure is optimal as long as the costs are not higher than the costs of disclosure. Disclosure costs are argued to be highest when parent entities use controlled associates to harbor off-balance sheet debt. The parent entity may have either low or high debt in its own right. Low-debt parent entities potentially stand to gain as much as high-debt parent entities by not consolidating all their debt. Cet. par., low-debt firms borrow at lower rates than high-debt firms, so low-debt firms face a larger hike in borrowing costs than high-debt firms following disclosure. High-debt firms face higher (known) bankruptcy risk, which is ameliorated by debt non-disclosure. Hence, low-debt and high-debt firms face similar disclosure costs, so are combined for analytical purposes.

Since associate-issued debt is not disclosed, the presence of controlled associates suggests the potential for significant off-balance sheet debt, so debt-free controlled associates are not predicted in equilibrium. Post-adoption leverage is not expected to fall through consolidation of controlled associates for otherwise earlier consolidation would have been optimal. Firms with controlled associates therefore have an incentive to continue their non-disclosure policy with respect to controlled associates' debt. When consolidation of controlled associates would have resulted in higher post-adoption disclosed leverage than pre-adoption, parent entities can avoid consolidation (and hence disclosure) by: (a) altering their equity ownership to avoid inference of control, (b) reclassifying equity investments to a non-control status without change in equity ownership, and (c) complete non-disclosure of the disposition of their controlled associates. Liquidations of controlled associates are also reported. These are voluntary, which implies solvency. Clearly, liquidations differ from disposals only in that a buyer has been found for the latter, but not the former. Since concurrent liquidations of subsidiaries, which are used as a control, nearly always relate to windings-up of shelf or dormant companies, liquidations of controlled associates are not counted among the alternative responses. Case (a) requires altering the equity ownership as necessary to form an IJV, selling down the associate to an ownership level that does not imply control, or completely selling off the associate. Sell-downs have the same control consequences as sell-offs in this paper because sell-downs were sampled only when the controlled implications changed. Conversions to IJVs are treated as disposals because part of the existing equity ownership is transferred to the co-venturer. Reclassifications (case (b)) are not analyzed further because just two observations were found. Reclassification and complete non-disclosure (case (c)) increase the risk that investors infer off-balance sheet debt in the absence of other disclosures. A cursory survey of annual reports found no separate disclosures seeking to justify shareholdings of 50.0 percent in associate entities. Given the commonality of using these associates as debt raising vehicles, controlled associates are therefore regarded synonymous with high debt levels. Disposals are good news as long as the proceeds are used to repay debt (see Lang, Poulsen and Stulz, 1995). Firms are hypothesized to prefer disposal to non-disclosure only when disposal is profitable; if buyers cannot be found at a satisfactory price, non-disclosure is the only remaining choice. Disposals can be made at a price below present value, as long as the discount is limited by the disclosure costs avoided. As a consequence, observed pre- and post-adoption debt levels remain much the same. In contrast, when consolidation of controlled associates does not increase leverage, consolidation is predicted.

Since a natural consequence of adoption of AASB 1024 is increased post- versus pre-adoption disclosed leverage, unchanged leverage around the time of adoption is construed as evidence that firms restructure or recontract to mitigate the disclosure costs of the Standard. Ceteris paribus, the first hypothesis may be stated:

H1: For a given firm, pre-adoption and post-adoption leverage are the same.

Firms avoid consolidation by disposing of the controlled associate(s) when the disclosure costs mandated by AASB 1024 are too costly. Hence, the pre-adoption disposal rate for non-consolidating firms (NCF) is hypothesized higher than their post-adoption rate and the pre-adoption disposal rate for firms consolidating their controlled associates (CF). The observed disposal rate is adjusted for concurrent disposals of subsidiaries to form a relative disposal rate. This is necessary because transactions in associates could be driven by economic opportunities that are common to subsidiaries as well. Specifically, disposals are more likely in prosperity than recession, so observation of more disposals of controlled associates than subsidiaries in 1992 (a recession year) implies an economic consequence of AASB 1024:

H2: NCF have a higher relative disposal rate pre-adoption than post-adoption.

H3: NCF have a higher relative disposal rate pre-adoption than the corresponding rate for CF.

When disposal of a controlled associate is not optimal, an alternative option is not to disclose publicly the controlled associate. This option is most valuable when there are multiple lenders because private disclosures to individual lenders can be made without public disclosure. Public non-disclosure of controlled associates' financial data is more likely when the costs of consolidation are high. Hence, NCF are hypothesized to have higher non-disclosure rates than CF. By corollary, NCF have a higher relative non-disclosure rate pre-adoption than post-adoption.

H4: Pre-adoption, NCF have a higher relative non-disclosure rate than CF.

H5: NCF have a higher relative non-disclosure rate pre-adoption than post-adoption.

4. SAMPLE AND MEASURES

The largest 500 industrially listed Australian companies (firms) by market capitalization were sampled randomly for companies having (a) at least one associate entity, or (b) one or more unconsolidated investments with ownership levels over 50 per cent, in 1990 or 1991. Mining and industrial companies with major activities in the extractive industries were excluded because these industries frequently use joint ventures that make identification of controlled associates difficult, especially at 50% ownership. Foreign companies and banks were also excluded, the latter because of their uniquely high debt levels. This procedure yielded a sample of 40 firms. A given firm could have one or more controlled associates at any point, and this produced 63 useable observations. The companies selected are listed in the Appendix.

Since AASB 1024 remained ungazetted until the Corporations Law was made consistent in June, 1991, so pre-adoption responses are examined over a two-year window before the first set of financial statements to which AASB 1024 applied. Thus, pre-adoption sell-offs, sell-downs and conversions to IJVs &c. are measured across 1991 and 1992. The pre-adoption number of controlled associates is measured at 1990 financial year-ends because the lead time for the standard was long, which favored anticipation. The post-adoption number of controlled associates is measured at 1992 financial year-ends. Acquisitions were not counted, even if an acquired controlled associate was sold soon after acquisition. Such sell-offs are not attributable to AASB 1024, but if part of an asset restructuring programme, these sell-offs should be related to those of subsidiaries, which can be measured. Leverage is measured by the ratio of total liabilities to total assets (TL/TA). Pre- and post-adoption debt levels are measured at 1991 and 1992 financial year-ends, respectively.

Joint ventures are identified with reference to several sources of information. In about three-quarters of all cases the corporate status is disclosed either in the Associate Investments' note or in the Directors' Report. For the remainder, the status was inferred from surrounding disclosures, and where necessary was confirmed by telephoning the company secretary of the firm. For instance, firms in the natural resources and high technology industries and located overseas turned out nearly always to be joint ventures. A lower bound is set at the same percentage adopted by the Corporations Law for determining when an offeror already has effective control of an offeree, namely 30% (See Corporations Law, chapter 6, s. 648 1a). In the absence of disclosures, exactly 50.0%, 33.3% and 25% shareholdings are interpreted as being joint venture arrangements, where the firm shares control and therefore avoids inference of control from the perspective of AASB 1024.

The pre-adoption disposal rate is measured as the mean number of controlled associates sold- off, sold-down or converted to an IJV in 1991 and 1992, divided by the number of controlled associates at the end of 1990. The post-adoption disposal rate is the number of controlled associates disposed of in 1993, divided by the number of controlled associates at the end of 1992. This ratio is in turn divided by the corresponding disposal rate for subsidiaries to produce a relative disposal rate. Otherwise, for post-adoption purposes and descriptive statistics, the disposal rate is measured by the number of controlled associates disposed of in a given year, divided by the number of controlled associates at the start of the year. This rate is converted into relative terms by dividing by the corresponding disposals rate for subsidiaries.

The non-disclosure rate of a firm is the ratio of the number of non-disclosures of controlled associates to the number of controlled associates at the beginning of the same year. Non-disclosures are implied when a controlled associate is reported pre-adoption but does not appear post-adoption, and is not otherwise disposed of. Pre-adoption, the non-disclosure rate is the Mean of 1991 and 1992 disposals divided by the number of controlled associates at the end of 1990. Post-adoption, the non-disclosure rate is the ratio of 1993 disposals to the number of controlled associates at the end of 1992.

5. DESCRIPTIVE STATISTICS

For disclosure purposes, IJVs are close substitutes for controlled associates. The frequencies of all classes of sub-entities are reported in Table I. Associate entities include any joint ventures and partnerships reported as such. The steady decline in the numbers of all sub-entities apart from subsidiaries during the sample period reflects ongoing improvements to the design of corporate structures. The least decline is indicated for IJVs. This result is not unexpected because AASB 1024 did not impact on IJVs. The small decline in IJVs from 1990 to 1992 suggests that relatively few controlled associates were converted into joint ventures.

The large increase in the number of subsidiaries in 1992 presumably reflects the impact of the standard, but the absolute increase of 1705 far exceeds the decline of 41 in the number of controlled associates. The jump in subsidiaries possibly also reflects the emergence of the Australian economy from deep recession in 1992, but the fall in 1993 appears counter-intuitive. The drop in 1993 was caused by an ongoing high rate of voluntary liquidations combined with a sharp decline in corporate acquisitions. Both reflect efficient refocusing: asset restructuring was essentially completed as the recovery began.

For interpreting the ratio trends, median statistics are preferred because they are less affected by outliers than the mean values. Although the ratio of controlled associates to all associates is reasonably stable, associates, controlled associates and IJVs all show a secular decline in relation to the use of subsidiaries. On average, the decline is strongest in 1992. Trends in firm leverage are less clear because trends in the mean and median values of TL/TA and interest coverage are often opposing. The interest coverage ratio is defined as the ratio of earnings before abnormals, interest and tax (EBIT) to interest payments. In 1992, the year of the change, TL/TA appears to increase slightly. There is a strong suggestion that the controlled associates were not debt-laden, for Selling, Sondhi and Sorter (1989) report a mean increase in leverage of 92.7% when finance subsidiaries were consolidated pursuant to SFAS 94.

Table III indicates the dispositions of controlled associates around the introduction of AASB 1024. Dispositions comprise either transactions or reclassifications. Raw counts are difficult to interpret because there is no normalization for systematic differences between the corporate structures of CF and NCF. To adjust for this, the counts are divided by the number of total entities, which is the sum of subsidiaries and all associates (whether controlled or not) in a given year. In aggregate, this measure is unaffected by conversions to subsidiaries or IJVs, but is understated when disposals or liquidations of controlled associates occur. However, since the latter dispositions are minor relative to the numbers of subsidiaries, any induced bias should be very small.

Table II indicates that the structure of raw counts remains approximately intact when observed numbers are normalized by the total number of entities comprising the firm. Several empirical regularities emerge. The first is that consolidations dominate all non-consolidation in 1992, as expected. This outcome does not obtain in either 1991 or 1993. Second, sell-offs are on average the most common form of non-consolidation, particularly in 1991 and 1993. Third, conversions to IJVs and sell-downs are relatively minor in all three years. Fourth, liquidations peak in 1992. This is possibly attributable to firms' restructuring as they emerge from the recession. Finally, non-disclosed dispositions are the second-ranking non-consolidation in 1991 and 1993, and equal-highest in 1992. This latter group represents full non-disclosure of data relating to controlled associates. Presumably, the high rate of non-disclosure in 1991 was in anticipation of AASB 1024.

The empirical relation between accounting and investment/disinvestment responses to AASB 1024 is highlighted in the bottom panel. The ratio of non-disclosures to the sum of all changes in equity ownership exceeds .5 pre-adoption. Post-adoption, the ratio does not decline markedly. This result is expected because a non-disclosure must be maintained in order not to signal the economic significance of the non-disclosure.

The comparative significance of non-disclosures emerges again through the ratio of non-disclosures to consolidations. Pre-adoption, the ratio exceeds unity, suggesting that consolidation was a costly alternative for many companies. The sudden increase in this ratio in 1993 is merely an artifact of the decline in consolidations as AASB 1024 was fully implemented.

6. EMPIRICAL RESULTS

The test results for H1 through H5 are presented in Table III. The Mann-Whitney U-statistic tests whether paired groups are independent in terms of their central tendency. This is a non-parametric test that allows sample variances to assume any value. Where inequalities are correctly (incorrectly) signed a one-tail (two-tail) probability is reported.

Our findings may be summarized as follows. H1 receives empirical support. As argued, the mooted increase in leverage does not materialize, suggesting that firms were actively recontracting immediately prior to the commencement of AASB 1024. This is further evident in the tests of H2, H3 and H5. Disposals are evidently a viable alternative to consolidation because NCF disposal rates were significantly higher than both the post-adoption NCF disposal rate (H2) and the pre-adoption CF disposal rate (H3). The pre--versus post-adoption disposal rate for CF was examined to ensure that disposals were not recovery-driven. If they were, then both NCF and CF would exhibit a higher post-adoption disposal rate than the corresponding pre-adoption rate. Our results indicate that only CF have a higher post-adoption disposal rate than pre-adoption. The difference is significant at p=.038, using a Mann-Whitney U test (U=230, [n.sub.1]=[n.sub.2]=23). Of the two non-disclosure hypotheses, only H5 achieved statistical significance. The pre-adoption NCF non-disclosure rate is not significantly greater than the CF pre-adoption nondisclosure rate, but is significantly greater than the NCF post-adoption non-disclosure rate.

7. CONCLUSION

Firms are found to have reported fewer controlled associates post-adoption than pre-adoption, reflecting the compliance consequences of AASB 1024. The fact that post-adoption leverage did not increase suggests that consolidated controlled associates had debt levels similar to the group. The disclosure costs of these CF were therefore presumably not high. There is also a likelihood that these firms had previously disclosed their off-balance sheet obligations in other ways, but this proposition is not testable. The implication is that the higher debt levels of controlled associates of NCF were not fully known in the debt market, else the firms would have consolidated. Disposals for NCF were a major response mechanism to AASB 1024. This suggests the costs of restructuring investment portfolios are less than the costs of disclosing off-balance sheet debt. There is evidence that non-disclosures are another significant mechanism used by NCF to avoid consolidation. Little evidence is found of a systematic relationship between non-disclosure and disposal rates for either CF or NCF.

TABLE 1

DESCRIPTIVE STATISTICS OF CORPORATE STRUCTURES AND LEVERAGE
FOR YEARS AROUND INTRODUCTION OF AASB 1024

n=63                                        Pre-adoption

                                            1990         1991

Numbers of sub-entities
All associates                               385          384
Controlled associates                        213          194
Incorporated joint ventures                  132          136
Subsidiaries                                5865         5838

Internal corporate structures
Controlled associates/all associates
Mean                                            .549         .537
Median                                          .5           .500
Standard Deviation                              .322         .318
All associates/subsidiaries
Mean                                            .189         .172
Median                                          .091         .091
Standard Deviation                              .357         .285
Controlled associates/subsidiaries
Mean                                            .095         .078
Median                                          .033         .076
Standard Deviation                              .153         .095
IJVs/controlled associates
Mean                                            .714         .790
Median                                          .500         .308
Standard Deviation                             1.052        1.206
IJVs/subsidiaries
Mean                                            .067         .044
Median                                          .016         .016
Standard Deviation                              .201         .098

Leverage
Total liabilities/Total assets
Mean                                            .512         .594
Median                                          .541         .451
Standard Deviation                              .172         .484
Interest coverage ratio
Mean                                          36.21        10.34
Median                                         1.41         1.52
Standard Deviation                           246.7         36.89

n=63                                        Post-adoption

                                            1992         1993

Numbers of sub-entities
All associates                               322          287
Controlled associates                        153          140
Incorporated joint ventures                  126          117
Subsidiaries                                7543         6843

Internal corporate structures
Controlled associates/all associates
Mean                                            .448         .437
Median                                          .5           .5
Standard Deviation                              .357         .356
All associates/subsidiaries
Mean                                            .085         .088
Median                                          .063         .062
Standard Deviation                              .091         .097
Controlled associates/subsidiaries
Mean                                            .045         .048
Median                                          .019         .018
Standard Deviation                              .070         .068
IJVs/controlled associates
Mean                                            .800         .796
Median                                          .167         .085
Standard Deviation                             1.542        1.360
IJVs/subsidiaries
Mean                                            .028         .026
Median                                          .011         .012
Standard Deviation                              .045         .035

Leverage
Total liabilities/Total assets
Mean                                            .618         .524
Median                                          .514         .504
Standard Deviation                              .685         .217
Interest coverage ratio
Mean                                           6.11         5.82
Median                                         1.90         2.93
Standard Deviation                            18.40        52.86

TABLE II

DESCRIPTIVE STATISTICS IN RELATION TO DISPOSITIONS OF CONTROLLED
ASSOCIATES AROUND THE INTRODUCTION OF AASB 1024

n=63                                           1991         1992
                                               (pre-        (post-
                                               adoption)    adoption)

Aggregate numbers of dispositions and controlled associates in the
sample:

Accounting choices

--compliance: consolidations                     14           59
--non-compliance: disposition not disclosed      17           10
Changes in equity ownership
conversion to IJVs                                2            2
sell-offs                                        22           10
sell-downs                                        3            3
liquidations                                      4            8
sub-totals                                       31           23
Total number of entities accounted in the      6222         7865
sample at year-beginning

Ratios of aggregate disposition frequencies/total entities pooled
across the sample:

Accounting choices

--compliance: consolidations                       .225         .750
--non-compliance: disposition not disclosed        .273         .127
Changes in equity ownership
conversion to IJVs                                 .032         .025
sell-offs                                          .354         .127
sell-downs                                         .048         .038
liquidations                                       .064         .102
Ratio of non-disclosures/total                     .548         .435
changes in equity ownership
Ratio of non-disclosures/consolidations           1.214         .169

n=63                                           1993
                                               (post-
                                               adoption)

Aggregate numbers of dispositions and controlled associates in
the sample:

Accounting choices

--compliance: consolidations                      9
--non-compliance: disposition not disclosed       6
Changes in equity ownership
conversion to IJVs                                0
sell-offs                                         8
sell-downs                                        5
liquidations                                      2
sub-totals                                       15
Total number of entities accounted in the      7130
sample at year-beginning

Ratios of aggregate disposition frequencies/total entities
pooled across the sample:

Accounting choices

--compliance: consolidations                       .126
--non-compliance: disposition not disclosed        .084
Changes in equity ownership
conversion to IJVs                                0
sell-offs                                          .112
sell-downs                                         .070
liquidations                                       .028
Ratio of non-disclosures/total                     .400
changes in equity ownership
Ratio of non-disclosures/consolidations            .667

TABLE III

TEST RESULTS FOR [H.sub.1], THROUGH H [H.sub.5]

H#   Test metric                      Hypothesis

1    Leverage                         pre-adoption   =   post-adoption
     n                                63                 63
     Mean                             1.104              1.140
     Median                           1.116              .992
     Standard Deviation               .549               .780
     Mann Whitney U probability       .222
2    Relative disposal rate of NCF    pre-adoption   >   post-adoption
     n                                63                 63
     Mean                             4.91               1.53
     Median                           0.00               0.00
     Standard Deviation               11.12              4.96
     Mann Whitney U probability       .020 **
3    Pre-adoption relative disposal
       rate                           NCF            >   CF
     n                                40                 23
     Mean                             1.53               0
     Median                           0                  0
     Standard Deviation               4.91               0
     Mann Whitney U probability       .040 **
4    Pre-adoption non-disclosure
       rate                           NCF            >   CF
     n                                40                 23
     Mean                             .152               .061
     Median                           0                  0
     Standard Deviation               .395               .164
     Mann Whitney U probability       .338
5    NCF non-disclosure rate          pre-adoption   >   post-adoption
     n                                40                 40
     Mean                             .152               .024
     Median                           0                  0
     Standard Deviation               .395               .158
     Mann Whitney U probability      .008 *

** and * significant at .05, and .01 levels, respectively
(one-tailed).

8. REFERENCES

Australian Accounting Standards Board, Approved Accounting Standard AASB 1016: Dis-closure of information about investments in associated companies, June 1989.

Australian Accounting Standards Board, Approved Accounting Standard AASB 1024: Con-solidated Accounts, September 1991.

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Selling, Thomas I., Sondhi, Ashwinpaul C. and Sorter, George H., "Consolidating Captive Finance Subsidiaries: The Impact of SFAS 94 on Financial Statements", Financial Analysts Journal, Vol. 45 (6), November/December, 1989, 72-75.

Shleifer, Andrei, and Vishny, Robert W., "Liquidation Values and Debt Capacity: A Market Equilibrium Approach", Journal of Finance, Vol. 47 (4), 1992, 1343-1366.

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