Parent and Subsidiary Earnings Announcements and Parent and Subsidiary Valuation

Abstract

A firm's earnings announcements are an important source of value relevant information to market participants. They are, however, only one such source of information. The study reported in this paper involves another source of information: the earnings announcements within pairs of parents and their majority-held subsidiaries. We examine both firms ‘security price reactions to both firms’ earnings announcements for evidence of information flows within the pairs of firms. We find significant parent and subsidiary price reactions at their own earnings announcements only when the announcement is the first within a parent-subsidiary pair. The implication is that the first earnings announcement pre-empts some of the information released by the later announcing firm. In addition, parent firms also exhibit significant price reactions to subsidiary earnings announcements when subsidiaries announce earnings first. The magnitude of the parent price reactions suggests that incremental information is conveyed in the subsidiary earnings announcement regarding the earnings of the parents' non-subsidiary assets. The implication of this information transfer is that subsidiary earnings are particularly valuation-relevant to parent firm shareholders.