Information Content of Subsidiary Earnings beyond Parent-Only Earnings and It’s Contributing Factors

This study investigates the information content of quarterly earnings announcements for subsidiary earnings beyond parent-only earnings, both of which are identified under the IFRS-based, consolidated reporting regime in Korea, and examine the contributing factors to the relative informativeness of subsidiary earnings. It is well known that major companies in many countries have expanded their business area globally through holding a large number of subsidiaries, including Korea where a large group of conglomerates have a business and ownership structure that closely involves many subordinate affiliates. Under this business environment, it is important for investors and other stakeholders to obtain information on subsidiaries’ business performance, not merely confined to the parent-company information. To what extent the subsidiary earnings provide incremental information to investors in comparison to the parent-only earnings is essentially an empirical question, since the accounting quality and the business features as represented by the subsidiary earnings can substantially differ from those of the other earnings. This study conducts empirical tests utilizing firm-quarter data on the earnings announcements of Korean listed firms after the IFRS adoption in 2011. The test results show that subsidiary earnings are persistent into future consolidated earnings, as much as parent-only earnings, consistently for each of the four earnings levels (sales revenue, operating income, profit before tax, and net income). Further, investors respond to the subsidiary earnings surprise substantially, and the magnitude of the market response is even slightly stronger than that for the parent-only earnings. Additionally, the market response to subsidiary earnings news is more pronounced for firms with higher subsidiary earnings persistence, and firms with higher level of international diversification through foreign subsidiaries. Collectively, this study shows that disclosure of subsidiary earnings can provide market participants with high-quality accounting information that is incrementally useful beyond parent-only earnings. Further, this study presents new findings on the potential elements contributing to the informativeness of subsidiary earnings in terms of accounting property and business environments as well.