Management of Note Disclosures : The Case of Unconsolidated Subsidiaries Prior to Fas No. 94

Statement of Financial Accounting Standards Number 94 (FAS 94) requires that firms consolidate all majority-owned subsidiaries, including those that were previously exempt from consolidation requirements due to the dissimilarity of parents/subsidiary operations. Prior to FAS 94, firms disclosed summary information on unconsolidated subsidiaries in their notes. This research demonstrates that, although the overall sample is unbiased, pre-FAS 94 note disclosures were insufficient to enable users to obtain an accurate picture of consolidated leverage for a number of firms. The research also illustrates that firms that underreported subsidiary debt had significantly higher consolidated leverage (as measured using pre-FAS 94 note disclosures) than other firms and that the market appeared to have relied on these inaccurate disclosures in assessing firm value