This thesis examines accounting for investments in associates. It addresses the following research issues: do corporate joint ventures possess economic characteristics distinct from other associated companies and, if so, do these economic attributes predict valuation policy, namely cost or revaluation of the investment in associates.
The study draws on transactions cost explanations, informed by monitoring incentives developed in the agency literature, to provide the framework to explore organisational arrangements for associated companies and accounting policy choice. Differences in the governance structures of corporate joint ventures and other associates are used to explain operating and financing characteristics and the valuation policy adopted for investments in associates.
The contract that distinguishes corporate joint ventures from other associates is the shareholders' agreement governing the conduct and operation of the venture. Corporate joint ventures are likely to be integrated operationally and financially with the investor because the conditions which provide incentives for such governance mechanisms are those which imply non-arm's length transactions between investor and investee. Interdependencies are therefore expected to reflect governance structures. In turn, interdependencies provide an incentive to adopt accounting policies that mitigate opportunism between related parties. Accounting policy for valuation of associates is expected to be endogenously determined with other aspects of the governance structure.
The results indicate that corporate joint ventures differ systematically from other associates. Strong empirical support for infra-group differences in operating interdependence is provided. Corporate joint ventures are more likely to trade with their investors than other associates, and this is observed for both purchases and sales. With respect to financing interdependence, the results show that corporate joint ventures are more likely to have guarantees, use short-term investor financing and retain higher levels of profits relative to other associates.
Contrary to predictions, non-current financing and leverage are not supported in multivariate testing. The absence of a relationship for non-current investor financing is consistent with the permissible alternative contained in the precedent shareholders' agreement, that is, the use of external borrowings supported by investor guarantees. Furthermore, there is no incremental explanatory power in leverage after controlling for specific forms of financing, viz. guarantees, investor loans and retained profits.
Examination of the accounting policy choice, whether to revalue investments in associates, reveals that, after controlling for leverage and the materiality of the investment in associates, the larger the investment in corporate joint ventures as a proportion of the investment in associates the more likely is revaluation. In an alternative specification of the independent variable that substitutes operating and financing characteristics for governance structure, the results show that a higher volume of purchases by investees reduces the likelihood of revaluation. As the only discriminating variable, it is supportive of an efficiency explanation of valuation policy in circumstances likely to generate unrealised profits from related party transactions.