The Relation between Incremental Subsidiary Earnings and Future Stock Returns in Japan

32 Pages Posted: 3 Jan 2002

See all articles by Don Herrmann

Don Herrmann

Oklahoma State University - Stillwater - School of Accounting

Wayne B. Thomas

University of Oklahoma

Tatsuo Inoue

Kwansei Gakuin University - Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 2001

Abstract

Japanese firms report both parent-only and consolidated financial statements. Because of the unique business environment in Japan, there is a widely held view that parent-only data provides a better means for assessing the value of the entire firm. We find that both parent-only and subsidiary earnings are important in predicting future consolidated earnings. However, while stock prices accurately reflect the persistence of parent-only earnings, the Japanese stock market appears to underestimate the persistence of subsidiary earnings, causing a significant positive relation between changes in subsidiary earnings in year t and stock returns in year t+1. This relation between subsidiary earnings and future stock returns does not persist beyond year t+1. Taking a long (short) position in firms with large, positive (negative) changes in subsidiary earnings results in an average annual abnormal return of 7.06% with positive returns in 12 of the 13 years in the test period.

Keywords: Consolidated earnings, Parent-only earnings, Market efficiency, Mishkin model, Japan

JEL Classification: G14, G15, M41, N25

Suggested Citation

Herrmann, Don and Thomas, Wayne B. and Inoue, Tatsuo, The Relation between Incremental Subsidiary Earnings and Future Stock Returns in Japan (July 2001). Available at SSRN: https://ssrn.com/abstract=294531 or http://dx.doi.org/10.2139/ssrn.294531

Don Herrmann

Oklahoma State University - Stillwater - School of Accounting ( email )

College of Business Administration
345 Business Building
Stillwater, OK 74078
United States

Wayne B. Thomas (Contact Author)

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

Tatsuo Inoue

Kwansei Gakuin University - Business School ( email )

Department of Accounting
Nishinomiya
Japan

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