Consolidated or Standalone earnings – What do investors react to?
Abstract of the paper
When an entity exerts control over one or more entities, providing consolidated financial statements is the norm in several countries around the world. However, a unique financial reporting rule in India requires firms to provide annual financial statements at both the consolidated (parent + subsidiary) and standalone levels (parent only). The availability of two sets of financial information allows us to decompose the
overall earnings in two components – parent and subsidiary. This decomposition allows us to examine whether stock market reacts differently to these two components. We find that the market places more weight on earnings surprise of parent compared to the earnings surprise of subsidiary. This differential treatment of parent versus subsidiary earnings surprise is consistent with the persistence of these two components of earnings. Overall, the findings of our paper indicate that the stock market finds disaggregation of earnings as parent versus subsidiary as informative and processes such information efficiently.