Nowhere to Hide: Corporate Restructuring Activities Response to Mandatory Segment Disclosure

Abstract

We examine the effect of mandatory financial disclosures, specifically the segment disclosure SFAS 131, on corporate restructuring activities such as mergers and acquisitions (M&As) and spin-offs. After the implementation of the mandatory segment disclosure standard, we find that firms have less incentive to engage in M&A activities and to complete the M&A deals. However, conditional on engaging in acquisition activity, SFAS 131 drives firms to acquire large diversified targets. The market perceives these large diversified M&As as value- enhancing after the SFAS131. Similarly, we further show that the probability of a division being spun off is lower after the SFAS 131 adoption than that before the SFAS 131 adoption, suggesting that firms are more likely to spin off their different operating units ex-ante to avoid disclosing these unit’s information and to strengthen their public image ex-post. We also find a positive market reaction to spin-off events, especially after the SFAS 131 was mandated. Overall, our results suggest that the segment disclosure standard disciplines managers’ (value- enhancing) corporate restructuring activities.