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[qwerty]

Let's say you run two sites that have similar audiences and as such, they link back and forth rather a lot.

Now let's say that Webmaster Tools indicates that on one of those sites, Googlebot is hitting a large number of 404 errors. No big deal, right? Google has stated very clearly that 404s are the proper response to a request for a URL that doesn't exist, and they don't hurt your ranking

Generally, 404 errors don’t impact your site’s ranking in Google, and you can safely ignore them. Typically, they are caused by typos, misconfigurations (for example, for links that are automatically generated by a content management system) or by Google’s increased efforts to recognize and crawl links in embedded content such as JavaScript.

But what about the site that's causing Googlebot to head off on all of these wild goose chases? (And have you guessed yet that it's your other site? OK, that first sentence kind of ruined the mystery.) What does it do to the authority of a domain to have it regularly generating links that 404? And does it make a difference that these two sites just happen to be subdomains of the same root domain?

[OldWelshGuy]

My experience is that bad housekeeping leads to a loss of trust which impacts on the overall performance of the site. I have found this especially true of internal errors i.e. linking internally and generating a 404 error.