Noncontrolling Interests: the Discretionary Reporting of Noncontrolling Interests and Its Association with the Market Assessment of Credit Risk

This paper empirically examines the determinants and the credit market implication of firms? decision to classify noncontrolling interests in the liability versus mezzanine section of the balance sheet. I hypothesize and find that firms with greater exposure to litigation risk from noncontrolling shareholders and firms with more serious information asymmetry problems are more likely to conservatively classify noncontrolling interests as a liability to mitigate agency costs. However, consistent with more serious agency conflicts due to controlling ownership, I predict and find that family firms are more likely to adopt the mezzanine classification. After controlling for the endogeneity of firms? classification choice, I find that firms adopting liability classification have higher credit ratings. This is consistent with my hypothesis that creditors are more likely to favorably assess the credit risk of companies that conservatively classify claims on their balance sheet.