The Effect of Holding Public Subsidiaries on the Information Environment of Consolidated Entities

• In Event: Financial Accounting Issues: International Evidence I

Abstract

Diversity in ownership structures of public companies worldwide poses a challenge for standards setters when developing a concept of the “reporting entity.” This study investigates whether public subsidiaries provide useful financial information to equity investors in consolidated entities. The sample consists of German consolidated entities that are: (1) traded on major German stock exchanges over the fiscal years 2005-2012, and (2) hold subsidiaries with public common equity. I find that public subsidiary earnings are incrementally informative about consolidated entity returns beyond consolidated entity earnings. I also find that this incremental informativeness varies systematically with: the relative size of the public subsidiary; the number of public subsidiaries held by the consolidated entity; and the country, industry, accounting standards, and fiscal year-end of the public subsidiaries. Finally, I find that the informativeness of consolidated entity earnings is higher for consolidated entities with domestic public subsidiaries than for those with only private subsidiaries. Combined, my results suggest that public subsidiary earnings are not only incrementally informative, but also complementary in that they enhance the informativeness of consolidated entity earnings. This study contributes to the literature that identifies the information environment as an economic determinant of the informativeness of earnings and also provides information to the boards as they develop a concept of the reporting entity.

Author

• Abbie Daly, University of Wisconsin–Whitewater