The incremental informativeness of public subsidiary earnings

Purpose: This study aims to investigate how holding public subsidiaries affects the information environment of consolidated entities in Germany. Design/methodology/approach: The sample consists of German consolidated entities that are traded on major German stock exchanges over the fiscal years 2005-2012 and hold subsidiaries with public common equity. The informativeness of earnings, defined as the association between earnings and returns, is used to investigate how holding public subsidiaries affects the information environment of consolidated entities. Findings: Findings suggest that public subsidiary earnings are incrementally informative about consolidated entity returns beyond both consolidated and segment earnings reported by consolidated entities in Germany. An investigation into the factors that affect the incremental informativeness of public subsidiary earnings reveals that public subsidiary earnings are more incrementally informative when, compared to the consolidated entity, they are relatively large, have dissimilar growth prospects and are from the same country (i.e. Germany). Practical implications: These findings suggest that this disclosure is useful to investors and that this type of disclosure could be valuable to adopt in other countries that do not have this disclosure requirement. Originality/value: These findings contribute to the streams of literature that: investigate ways that regulators can improve the information environment of corporations, compare the informativeness of accounting measures and investigate the informativeness of subsidiary information.