“Onto-Balance Sheet” Accounting under Principle-Based Consolidation Standards : Evidence from State-Owned Enterprises in China

Zhang, Shanshan and Zhang, Mingwei and Chen, Mingyu and Cheng, Xiaoke (2026) “Onto-Balance Sheet” Accounting under Principle-Based Consolidation Standards : Evidence from State-Owned Enterprises in China. Accounting Horizons. ISSN 0888-7993

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Abstract

To prevent firms from hiding losses and risks in unconsolidated subsidiaries, standard setters have progressively broadened the scope of consolidation, which results in greater managerial discretion in adding entities for consolidation. We examine whether state-owned enterprises (SOEs) with higher state ownership, hence stronger empire-building incentives, are more inclined to exploit this discretion to consolidate additional investees. China’s mixed-ownership reform, which introduces nonstate blockholders and reduces state ownership, provides an ideal setting. We find that SOEs are less likely to exploit the discretion to consolidate their investees after the reform. The decline is sharper when accounting standards allow greater discretion, when consolidation yields larger asset increases, and when the government places greater emphasis on expansion. Further analyses reveal that consolidation accounting generates real benefits, which diminish after the reform. Our study provides novel evidence on aggressive consolidation under principle-based accounting standards and offers insights for standard setters refining the consolidation boundary.