The Effects of the Reporting of Off-Balance-Sheet Investments on EPS Uncertainty, Leverage and Shareholders’ Wealth
Financial Management Winter 2012 • pages 1009 - 1042
Posted: 9 Aug 2013 Last revised: 19 Sep 2015
Date Written: December 30, 2011
The degree of control over operations affects the quality of information provided to investors. Uncertainty about operating performance increases following the first equity method (EM) reporting of off-balance-sheet investments, but only when the investments are joint ventures (JVs). Partners in JVs report lower levels of debt. These results are not due to informational deficiencies of the EM, but to the riskier nature of JVs. Long-run stock performance analysis indicates that investors experience normal risk-adjusted returns when investing in firms with economically significant off-balance sheet investments.
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