Is the Relation between Non-Controlling Interests and Parent Companies Misleading?

This paper investigates whether different levels of investor protection affect the market valuation of Non-Controlling Interests (NCI)' share of subsidiaries in a consolidated entity. Using a set of European publicly listed firms, our findings suggest a positive association of NCI with parent companies' share prices in countries with low levels of investor protection and a negative association in countries with higher levels. This suggests that when non-controlling investors are not well protected, parent companies have an opportunity to extract rents from non-controlling owners which leads to a positive valuation of NCI's equity. However, in countries where non-controlling investors are well protected, parent companies are not able to extract rents but still must monitor and govern the related subsidiary so NCI becomes a net cost and the relation flips