Market's Response to Geographic Segment Disclosure: Evidence from Corporate International Diversification

Abstract

Statement of Financial Accounting Standard No. 131 issued in 1997, regulates the reporting of geographic segment information by U.S. firms SFAS. 131: Reporting Disaggregated Information about a Business Enterprise and Related Information supersedes previous segment-reporting rules of SFAS No.14 (FASB 1976). SFAS No. 131 requires firms to disclose segment data in their annual reports for each material category of foreign involvement. Through these provisions SFAS 131 increased the scope for geographic segment information. We examine the value relevance of SFAS 131 by testing investors' responses to asset components disclosed under SFAS 131 and the explanatory power of foreign and U.S. assets. First, we find, as predicted that both foreign and domestic assets of U.S. multinationals are significantly positively correlated with changes in market value of common equity, even after we control for other identified determinants of share price. Second, we find that foreign assets, equity book value and U.S. assets explanatory power vary predictably across different specifications. The observed changes in share price sensitivity are consistent with SFAS No. 131 disclosures providing useful information to investors. Overall, our results suggest investors' greater recognition and processing of asset components after the change in geographic segment reporting.