The Reaction of the Security Market to the Quality of Segmental Disclosures: an Empirical Investigation.

Abstract

This research was undertaken to examine the securities market reaction to the quality of segmental disclosures required by FASB Statement Number 14. The investigation updates the previous empirical studies which examined the securities market reaction to the Securities and Exchange Commission's Segmental disclosure rules. Information from three hundred diversified firms and their beta values were obtained from the Value-line tape. One hundred and fifty of the firms were required to report segmental data in their annual financial reports. They were referred to as the experimental group. One hundred and fifty diversified firms were not required to report segmental data in the annual reports. They were referred to as the control group. The First step was to compare the systematic risk of the experimental group with the control group by using parametric and non-parametric statistics. The second step was to evaluate the quality of segmental disclosures in the annual financial reports of the experimental group. Based on the disclosure quality, the sample was divided into the high quality disclosure and the low quality disclosure groups. SIC code scores were calculated for each firm of the experimental group. A Spearman Rank Correlation test was conducted to determine the correlation between the disclosure scores and the SIC code scores. The results of this test indicated that the correlation of the two scores was statistically significant. Multiple Discriminant Analysis was applied to the high quality and low quality groups, based on twelve financial variables which are often discussed in the literature as affecting systematic risk. The results indicated that the two groups were homogenous with respect to these financial variables. In examining the securities market reaction to the segmental disclosures, two major groups were identified: (1) The Control Group; (2) The Experimental Group (subdivided into two groups); (a) The High Quality Disclosure Group; (b) The Low Quality Disclosure Group. The Kolmogorov-Smirnov two-sample test and the student's t-test, were used to find differences between: (1) The Control Group and the Experimental Group. (2) The Control Group and the High Quality Group. (3) The Control Group and the Low Quality Group. (4) The High Quality Group and the Low Quality Group. Finally, the Analysis of Covariance test was also conducted to find differences between the high quality disclosure group and the low quality disclosure group. The parametric and non-parametric tests gave essentially the same results: (1) The Kolmogorov-Smirnov test results indicated that there was no significant