Incentives for Segment Reporting

Abstract

FASB Statement No. 14 (December 1976) requires the disclosure of certain segment information, consistent with the actions of other regulatory bodies (the Securities and Exchange Commission in 1969 and 1970 and the Federal Trade Commission in 1974). A number of studies during the past ten or so years have focused on whether segment information is perceived as whether it improves the prediction of earnings, or whether it affects stock prices. While the findings of these studies have been generally consistent with the hypothesis that segment information is both used and useful, none of the investigations addressed aspects that are pertinent to the fundamental issue of whether a requirement that segment information be disclosed produces net social benefits. In particular, an important aspect which has not been addressed in the motivation for voluntary disclosure of segment information. Voluntary disclosures of segment revenues were fairly common even prior to the imposition of the first SEC requirement in 1969. For example, Hobgood [1971] reports that in the years 1967-69, about one-half of a sample of 614 companies, out of a population of 1,500 companies whose annual reports were received by the Financial Executives Institute Library, disclosed segment revenues voluntarily. Thus, one can assume that certain corporations would have chosen to disclose segment data voluntarily in the absence of any requirement by a regulatory body.1 In this paper we attempt to offer a framework to explain voluntary disclosures of segment information. Specifically, we identify a set of