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- Title
The Association between Competition and Managers' Business Segment Reporting Decisions.
- Authors
Harris, Mary Stanford
- Abstract
This study examines the relation between industry and firm characteristics and managers' segment definition decisions. Evidence on factors that influence managements' identification of business segments is timely as the Financial Accounting Standards Board, the Canadian Accounting Standards Board, and the International Accounting Standards Committee have revised disaggregated disclosure requirements. Increased guidelines for segment definitions was one of the motivations for these changes. One of the most often cited reasons for opposing segment disclosures is harm to the firm's competitive position. While this is generally taken to mean that managers prefer not to disclose segment data for operations in competitive industries, my results show that operations in less competitive industries, as measured by the four-firm concentration ratio and the speed of abnormal profit adjustment, are less likely to be reported as industry segments. To the extent that abnormal profits are more likely in less competitive industries, this finding suggests that managers attempt to conceal information that would allow rival firms to capture these profits by not reporting less competitive operations as business segments. This is true even though single-segment firms' disclosures partially re- veal the industry's profitability. Prior research indicates that segment data for operations with different levels of earnings persistence improve earnings forecasts. However, financial analysts criticize the current segment reporting standards because they allow managers to form segments in a way that decreases the usefulness of segment disclosures. The evidence supports this criticism; as within-firm heterogeneity in earnings persistence increases, the probability of segment disclosure decreases. However, if the cost of revealing this information to competitors exceeds the value to users of more accurate earnings forecasts, then managers may maximize shareholder value by not reporting industry operations with diverse earnings persistence. SFAS No. 131: Reporting Disaggregated Information about a Business Enterprise and Related Information (FASB [1997]) requires that segment definitions be based on internal reporting for performance evaluation. In contrast, I investigate the number of segments reported relative to the number that could be reported if SICs were used to define segments. This would match the segment definitions under SEAS No. 131 only if top management evaluates operations by SIC. However, consistent with the suggestion in the exposure drafts that ten is a practical limit to the number of reported segments, over 90% of the sample firms operate in ten or fewer industries. In addition, the majority of firms examined in this study have operations in industries that are not reported as business segments; the median number of industries in which the sample firms operate is five, while the median number of reported segments is three. If top man- agers separately evaluate the performance of these unreported opera- lions, then changing the segment identification requirements may achieve the FASB's objective of increasing the number of reported segments.
- Subjects
INDUSTRIAL management; INTERNATIONAL accounting standards; LINE of business reporting; BUSINESS enterprises; INDUSTRIAL laws &; legislation; BUSINESS failures
- Publication
Journal of Accounting Research (Wiley-Blackwell), 1998, Vol 36, Issue 1, p111
- ISSN
0021-8456
- Publication type
Article
- DOI
10.2307/2491323