Security Market Effects Associated with SFAS No. 131: Reported Business Segments

Abstract

In this study we examine the economic impact of the expected shift from the FASB's segment reporting requirements found in SFAS No. 14 to those found in SFAS No. 131. SFAS No. 131 was the joint effort of the United States' FASB and Canada's Accounting Standards Board (AcSB). It requires firms to report segments based on the firm's internal reporting and management arrangements (the management method) rather than on SFAS No. 14's line-of-business method. One alleged deficiency with the line-of-business method is its flexibility that allowed companies to combine segments. Analysts complained that companies abused this flexibility to conceal information. The management method allegedly is less flexible because companies must report segments externally the same way that they manage them internally. We examine the economic impact of the reporting standard shift by first developing company variables related to the alleged concealment of information under SFAS No. 14. These variables help us to explore why companies combine business segments under the line-of-business method and what costs companies are expected to incur when they are forced to implement the management method. Next we identify a series of dates that chronicle when the market received information about the content of SFAS No. 131. Results of the stock return tests suggest that SFAS No. 131 had a significant impact on firms that previously had the greatest incentives to conceal segment information, consistent with the conjecture that the standard imposed unanticipated costs on affected firms.