The Impact of Increased Segment Disclosure on Trading Profits of Corporate Managers: Evidence from SFAS No. 131

Abstract

This paper examines the impact of segment disclosure on the trading profits of corporate insiders. We focus specifically on the firms that increased their number of reported segments after the adoption of a new segment disclosure standard – SFAS No. 131 (CHG firms). Using a difference-in-differences method, we show that the insider profits of CHG firms are significantly greater than those of NOCHG firms in the pre-131 era. Additionally, we show that CHG firms exhibit a significant decline in insider profits relative to NOCHG firms in the post-131 era, which is consistent with Baiman and Verrecchia’s (1996) finding that the enhanced disclosure mitigates insiders’ ability to earn abnormal profits. This decrease is particularly pronounced in large firms whose segment information is more complex and difficult to disentangle, in firms not covered by analysts, and in pre-131 single-segment firms. Our results are robust to an alternative definition of insider trading activities and to alternative disaggregation measures. Overall, the results of this paper suggest that insiders use private segment information to obtain abnormal trading profits and that these profits are reduced when firms provide more segment data.