The Informativeness of Consolidated and Parent-only Earnings to Investors: Evidence from India

Abstract We examine whether earnings from parent-only financial statements are incrementally informative to those from consolidated financial statements. We use a unique mandate in India that requires firms to provide both consolidated and parent-level financial statements, since currently neither US GAAP nor IFRS mandates this level of disaggregation. While disaggregation provides additional information, it also imposes costs, raising the empirical question of whether its benefits outweigh the costs. Our analyses reveal that disaggregated quarterly earnings components inform investors, with investors placing more weight on parent-level unexpected earnings than on subsidiaries' unexpected earnings. We do not find evidence of mispricing associated with disaggregation; rather, the higher weight on the parent's earnings reflects higher persistence, consistent with semi-strong market efficiency. Moreover, parent earnings provide incremental informativeness, especially in the context of poor earnings quality and high mergers and acquisitions intensity. Our results endure when we examine annual parent- and subsidiary-level earnings, where available, in 98 countries around the world. Our results contribute to the literature on disaggregation in accounting and earnings informativeness in equity markets, offering insights that may influence regulatory considerations on the usefulness of financial statement disaggregation.