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

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  • Don Hermann
  • Tatsuo Inoue
  • Wayne B. Thomas

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 t7plus;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.

Suggested Citation

  • Don Hermann & Tatsuo Inoue & Wayne B. Thomas, 2001. "The Relation Between Incremental Subsidiary Earnings and Future Stock Returns in Japan," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(9‐10), pages 1115-1139, November.
    • Handle: RePEc:bla:jbfnac:v:28:y:2001:i:9-10:p:1115-1139:a
    DOI: 10.1111/1468-5957.00408
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    Cited by:

    1. Ole‐Kristian Hope & Tony Kang & Wayne B. Thomas & Florin Vasvari, 2008. "Pricing and Mispricing Effects of SFAS 131," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(3‐4), pages 281-306, April.
    2. Chen, Shimin & Wang, Yuetang, 2004. "Evidence from China on the value relevance of operating income vs. below-the-line items," The International Journal of Accounting, Elsevier, vol. 39(4), pages 339-364.
    3. Gongmeng Chen & Michael Firth & Daniel Ning Gao, 2011. "The Information Content of Earnings Components: Evidence from the Chinese Stock Market," European Accounting Review, Taylor & Francis Journals, vol. 20(4), pages 669-692, May.
    4. Akinobu Shuto, 2005. "Earnings Management to Exceed the Threshold: A Comparative Analysis of Consolidated and Parent-only Earnings," Discussion Paper Series 224, Research Institute for Economics & Business Administration, Kobe University, revised Jul 2008.

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