Abstract

This paper investigates determinants of managers’ segment financial reporting choices. It focuses on managers’ decisions to report firm-segment reconcilable differences (FSDs) – differences between firm-level and segment-level earnings. On average, the research found that FSDs are significant when the differences are not equal to zero. It also found that firms with more segments, greater analyst following, higher return on assets, and losses are more likely to report FSD≠0. However, larger firms and firms in a more competitive industry are less likely to report FSD≠0. In addition, the research found that firms having more segments, higher return on assets, higher return on equity, and growth are more likely to report aggregated segment-level earnings less than firm-level consolidated earnings (FSD>0). Conversely, firms with greater total accruals, a Big 6 auditor, and losses are less likely to report FSD>0. This study also found that firm-segment reconcilable differences, when they exist, are significant and that these differences are significantly different when comparing FSD 0 under the SFAS No. 131 segment reporting regime. This paper contributes to prior research in several ways. As the first study to examine these reconciliations, it further contributes to the understanding of segment disclosure practices by examining a unique setting in which management has discretion, based on how the firm is managed internally, to report segment information in a manner that may not be consistent with firm-level GAAP reported earnings measurements. Additionally, this analysis of firm-segment reconcilable differences allows for observation of the combined effects of “total” segment aggregation and discretionary segment profit measurement.

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