Abstract
This paper investigates managers’ choices with respect to both disclosure quantity and quality, and the usefulness of these two characteristics for financial analysts. Focusing on segment disclosures under the management approach, we measure quantity as the number of segment-level line items and quality as the cross-segment variation in profitability, and argue that more managerial discretion can be exercised over quality than over quantity. We hypothesize and find that managers solve proprietary concerns either by deviating from the suggested line-item disclosure in the standard, or, if following standard guidance, by decreasing segment reporting quality. Moreover, financial analysts do not always understand the quality of segment disclosures suggesting that a business-model type of standard creates difficulties even for sophisticated users. Our results inform standard setters as they start working on a disclosure framework and as they seem to consider the business model approach to financial reporting.
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