Determinants of the Managerial Discretion in the Accounting Choice for Investments in Joint Ventures

By Begoña Giner (University of Valencia) & Carmen S. Verón

This paper analyses the reasons behind the accounting choice to account for investments in a type of joint venture: the jointly controlled entity. The two alternative accounting methods are proportionate consolidation and equity method. Although this accounting choice does not affect the reported profit in the consolidated accounts, it has an impact on the amount of information disclosed, as well as on the financial ratios. The analysis is referred to 51 Spanish listed companies that made 893 accounting choices in the period of application of the Spanish rules for consolidation (1991-2004). These rules gave discretion about the method to be adopted, and did not require consistency. The results of the logit analyses support that the interdependence of the activities between the co-venturer and the joint venture, assets specificity, as well as size are positively associated with the adoption of the proportionate consolidation method, while leverage is negatively associated. As for the ownership structure the influence is not linear.

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