"Publicly Listed Parent/Subsidiary Pairs: Benchmarking to TOPIX and Market Distortion" (in Japanese)

This paper explores the impact of publicly listed parent/subsidiary pairs on the pricing and volatility of companies' shares. We construct a noisy rational expectations equilibrium model in which a parent and its subsidiary company are both publicly listed. Two classes of traders participate in the market: institutional investors who have private information on the fundamentals of @listed companies, and individual investors who have no private information. A key feature of the model is that institutional investors attempt to optimize the risk-return tradeoff relative to TOPIX, the capitalization-weighted index of the stock market. Individual investors are assumed to act without reference to any performance benchmark. Within this framework we first establish the rather obvious result that the market portfolio of all outstanding shares is not an efficient portfolio. This result implies that benchmarking to TOPIX, which is the surrogate of the market portfolio without any adjustment for double-counting of parent/subsidiary pairs, generates excessive demand for shares of the subsidiary company. We analyze the equilibrium of our market model and show that (1)the price of the subsidiary company's share is pushed up to a level higher than that implied by its fundamentals, (2)the share price of other companies who are highly correlated with the subsidiary company receive similar effect, (3)the subsidiary company's shares become more volatile and (4)tend to respond more to good news than to bad news. The results of this paper suggest that using TOPIX as the performance benchmark, which is the prevailing practice in evaluating pension fund managers and other institutional investors, may be causing distortion in share prices and volatilities of subsidiary companies. A new index which corrects for the double counting is worth a serious consideration.