ABSTRACT: This paper investigates the relative importance of parent-only and subsidiary earnings in Japanese firms using a variance decomposition methodology. The findings generally indicate that subsidiary return on equity (ROE) news has a greater effect in driving current stock returns than parent-only ROE news. In addition, we show that as subsidiary companies’ performance becomes relatively important as an indicator of consolidated performance, the market pays greater attention to subsidiary ROE news. Finally, we show that the market does not pay greater attention to subsidiary earnings when consolidated earnings are negative. In that case, parent-only earnings become a good indicator of consolidated performance.

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