An Evaluation of the Relative Importance of Parent-Only and Subsidiary Earnings in Japan: A Variance Decomposition Approach
Posted: 14 Nov 2006 Last revised: 19 Oct 2013
Date Written: November 14, 2006
This paper investigates the relative importance of parent-only and subsidiary earnings for a sample of Japanese firms by using the variance decomposition methodology of Vuolteenaho (2002), Callen and Segal (2004), and Callen et al. (2005). We find that, in general, subsidiary ROE news has a greater effect in driving current stock returns than parent-only ROE news. This supports the current accounting regulation in Japan, which places greater emphasis on the consolidated financial statements. In addition, we show that as the subsidiary companies' performance is more important as an indicator of consolidated performance, the market pays greater attention to subsidiary ROE news. Finally, we also show that when the parent-only earnings are negative, the market pays more attention to them. This indicates that the stock market is more attentive to bad news.
Keywords: parent-only earnings, subsidiary earnings, stock returns, variance decomposition, vector autoregressive model
JEL Classification: G12, M41, M44, M47
Suggested Citation: Suggested Citation