Incentives and governance mechanisms involved in consolidation decisions: Evidence from Italian listed companies

The business literature has demonstrated that the identification of one company’s “position of control” over another is sometimes the result of subjective judgment dictated by opportunistic decisions. These decisions can ensue from the existence of specific incentives which influence the structure of the group and its economic/financial performance. This is due to the fact that the consolidation model developed in many financial reporting regulations is based on a control principle and avoids bright-line tests. Such a situation can lead companies not just to different conclusions as to whether they control another entity (even in comparable circumstances), but also to create ad hoc “governance mechanisms” in order to “legally protect” the decision made. On this premise, this paper aims to achieve two objectives: a) to illustrate, with regard to situations of subjectivity, the approach taken by Italian listed companies, analysing the governance mechanisms established to protect the “power of control”; b) to investigate the existence of incentives which influence the consolidation decisions made by the parent company.