Don Herrmann
Oregon State University
Tatsuo Inoue
Kwansei Gakuin University
Wayne B. Thomas
University of Oklahoma
Abstract: Prior research finds a positive relation between subsidiary earnings and future stock returns in Japan, consistent with investors underestimating the persistence of subsidiary earnings. The purpose of this study is to investigate the subsidiary earnings anomaly in relation to financial analystsÂ’ earnings forecasts. We find that financial analysts also underestimate the extent to which current subsidiary earnings persist into future earnings. Additional analyses indicate that analystsÂ’ underestimation of subsidiary earnings persistence is more pronounced for smaller firms, is more pronounced for firms with higher debt-to-asset ratios, and occurs across industries. These results provide additional evidence as to the nature of the subsidiary earnings anomaly in Japan.
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