Geographic Segment Disclosures Research Articles

International Diversification, SFAS 131, and Debt Maturity Structure

This study examines the impact of geographic segment disclosures under the Statement of Financial Accounting Standards No. 131 (SFAS 131) on the debt maturity structure of internationally diversified firms. I find that the proportion of short-maturity debt increases with a firm’s international diversification. Moreover, the implementation of SFAS 131 attenuates the positive relation between international diversification and short-maturity debt. This attenuation effect is more pronounced for firms that continue to disclose geographic segment earnings in the post-SFAS 131 period than firms that do not. As short-maturity debt subjects firms to refinancing and potential costly liquidation risks, these results suggest a beneficial role of SFAS 131 in reducing firms’ reliance on short-maturity debt to address information asymmetry and agency costs of debt arising from international diversification. Furthermore, this study suggests that enhanced mandatory disclosure has a real effect on firms’ financing activities and capital structure.

Geographic segment disclosures under IFRS 8: Changes in materiality and fineness by European, Australian and New Zealand blue chip companies

This study examines how the adoption of International Financial Reporting Standard (IFRS) 8, Operating Segments, changed the entity-wide geographic segment reporting by European, Australian and New Zealand blue chip companies. The focus is on the revised requirements that companies disclose revenues for the country of domicile and other material countries. Specifically, it investigates the materiality level companies use to determine material countries and whether the revised requirements result in a finer set of geographic information than previously disclosed under International Accounting Standard (IAS) 14R.The study finds a significant decrease in the number of companies reporting only broad geographic regions and a significant increase in the number of companies reporting country specific segments and a mix of countries and regions after the adoption of IFRS 8. The increase in companies reporting country specific and mixed segments indicates that the requirement to disclose material countries under IFRS 8 resulted in a significant number of companies reporting disaggregated revenues at the individual country level. To the extent country specific information is more useful, financial analysts and the International Accounting Standards Board (IASB) should welcome this result.All three fineness measures increase significantly with the adoption of IFRS 8. These results indicate that the adoption of IFRS 8 did improve the fineness of the geographic disclosures provided by companies and suggests that the geographic data provided under IFRS 8 is less aggregated than the disclosures under IAS 14R.

Does Location Matter for Disclosure? Evidence from Geographical Segments

This paper uses a novel approach to examine motives for geographic segment disclosure. It is generally assumed that firms prefer not to disclose disaggregated segment information for proprietary reasons, although there is mixed support for this assertion in empirical work. We develop an approach that uses the location characteristics of geographic segments to empirically identify reasons for withholding or disclosing segments. Using hand-collected segment data around a switch in reporting standards that forced firms to reveal more disaggregated segment information, we find that proprietary costs are the main determinant of geographic segment disclosure. We find that segments in wealthier areas and ranked better for business tend to be hidden, while higher entry barriers to a segment’s location are positively related to the likelihood of a segment being disclosed. We also find that among previously unrevealed segments, proprietary costs also explain the non-disclosure of segment earnings and other information. In contrast, the attractiveness of a segment and entry barriers do not explain the amount of disclosed information for segments that were already disclosed prior to the switch in reporting standards. The findings suggest that proprietary, rather than agency costs, are a more important determinant of geographic segment disclosure.

The relation between segment disclosure and earnings quality

We investigate the relation between segment disclosure and earnings quality. Using a US sample for the period 2001–2006, we find a positive relation between earnings quality and the quantity of segment disclosures. We use lead-lag tests to examine the flow of causality, and our results show that current segment disclosure is positively related to prior levels of earnings quality, while current earnings quality scores are not related to prior levels of segment disclosure. Thus, the causality flows from earnings quality to segment disclosure. Our results hold for both business and geographic segment disclosure.

Cost of Equity Capital, Information Asymmetry, and Segment Disclosure

Theory predicts a negative association between the cost of equity capital and the level of financial disclosure of the firm. However, empirical evidence supporting a negative association between the cost of equity capital and the level of disclosure has been mixed (Botosan 1997; Botosan and Plumlee, 2002). Prior literature has not specifically examined the relation between the cost of equity capital and the level of segment disclosure (i.e., operating and geographic segment information). Segment reporting is considered by financial analysts worldwide, to be one of the most important, if not the most important, disclosure in financial reporting. Based on the average of four proxies commonly used to measure the cost of equity capital and a hand-collected index measuring the level of segment disclosures, this study initially finds an insignificant negative association between the cost of equity capital and the level of segment disclosure. However, the model does not consider the effects of information asymmetry between investors measured by the probability of information-based trading. Including the direct and interactive effects of the probability of information-based trading in the model we find: 1) a significant negative association between the cost of equity capital and level of segment disclosure, 2) a significant positive association between the cost of equity capital and the probability of information-based trading, and 3) a significant negative association between the cost of equity capital and the interaction term on the level of segment disclosure and probability of information-based trading. In summary, when the probability of information based trading is high (higher information asymmetry among different types of investors), we find the negative association between the cost of equity capital and the level of segment disclosures is stronger. Consistent results are obtained using two separate measures of the level of segment disclosures; a hand-collected index measuring the level of operating and geographic segment disclosures and a count of the number of words used in reporting overall segment information by the firm.

The Effect of Geographic Segment Disclosure Quality on the Valuation of Foreign Earnings

The Effect of Geographic Segment Disclosure Quality on the Valuation of Foreign Earnings

The Complementarity between Segment Disclosure and Earnings Quality, and Its Effect on Cost of Capital*

We investigate the relation between segment disclosure and earnings quality. Using a US sample for the period 2001–2006, we find a positive relation between earnings quality and the quantity of segment disclosures. We use lead-lag tests to examine the flow of causality, and our results show that current segment disclosure is positively related to prior levels of earnings quality, while current earnings quality scores are not related to prior levels of segment disclosure. Thus, the causality flows from earnings quality to segment disclosure. Our results hold for both business and geographic segment disclosure.

The effects of SFAS 131 geographic segment disclosures by US multinational companies on the valuation of foreign earnings

Foreign operations are becoming increasingly important for US companies. We investigate whether the market's valuation of foreign earnings is a function of the firm's geographic segment disclosures. Specifically, we examine the effects of an increase in the number of geographic segments disclosed and the inclusion of earnings measures in geographic segment disclosures following the adoption of SFAS 131. We find strong evidence that our proxies for increased disclosure are positively associated with the valuation of foreign earnings. Our results are robust to a number of sensitivity analyses. Taken together, our results suggest that the pricing of foreign earnings is associated with important aspects of the firm's information environment.

Market's Response to Geographic Segment Disclosure: Evidence from Corporate International Diversification

Statement of Financial Accounting Standard No. 131 issued in 1997, regulates the reporting of geographic segment information by U.S. firms SFAS. 131: Reporting Disaggregated Information about a Business Enterprise and Related Information supersedes previous segment-reporting rules of SFAS No.14 (FASB 1976). SFAS No. 131 requires firms to disclose segment data in their annual reports for each material category of foreign involvement. Through these provisions SFAS 131 increased the scope for geographic segment information. We examine the value relevance of SFAS 131 by testing investors' responses to asset components disclosed under SFAS 131 and the explanatory power of foreign and U.S. assets. First, we find, as predicted that both foreign and domestic assets of U.S. multinationals are significantly positively correlated with changes in market value of common equity, even after we control for other identified determinants of share price. Second, we find that foreign assets, equity book value and U.S. assets explanatory power vary predictably across different specifications. The observed changes in share price sensitivity are consistent with SFAS No. 131 disclosures providing useful information to investors. Overall, our results suggest investors' greater recognition and processing of asset components after the change in geographic segment reporting.

The Effects of SFAS 131 Geographic Segment Disclosures by U.S. Multinational Companies on the Valuation of Foreign Earnings

Foreign operations are becoming increasingly important for U.S. companies. We investigate whether the market's valuation of foreign earnings is a function of the firm's geographic segment disclosures. Specifically, we examine the effects of an increase in the number of geographic segments disclosed and the inclusion of earnings measures in geographic segment disclosures following the adoption of SFAS 131. We find strong evidence that our proxies for increased disclosure are positively associated with the valuation of foreign earnings. Our results are robust to a number of sensitivity analyses. Taken together, our results suggest that the pricing of foreign earnings is associated with important aspects of the firm's information environment.

The Relationship Between Corporate International Diversification and Firm Value: An Empirical Inquiry

The increasing relevance of foreign operations has led to accounting regulation decisions, which in turn, provide significant changes in MNCs accounting and reporting practices. Specifically, FASB (1997) issued Statement of Financial Accounting Standards (SFAS) No. 131 to increase the profile of geographic segment disclosure. This study provides evidence on whether international diversification, as measured by foreign assets of U.S. firms is associated with market value of common equity. The paper finds evidence of market valuation of foreign assets that is consistent with theoretical expectations and robust to different approaches and specifications. Consistent with Errunza and Senbet (1984), I find that international diversification is significantly correlated with firm value, suggesting that firms that internationalize are rewarded with high equity value. The multivariate tests indicate the average annual value of a firm with foreign operations is 2.6% higher than firms without foreign assets. In firm-size comparison, I report that large firms experience significantly greater price responses than small firms. This finding is consistent with differential risk hypothesis in Easton and Zmijewski (1989) and Collins and Kothari (1989) but inconsistent with differential information hypothesis of Atiase (1985). In a comparison of U.S. domestic and foreign assets, the analysis indicates that investors' valuation of assets depends on the operating environment in which the firm is operating. That is, there is cross-sectional valuation differences arising from the market assessment of the probability of recovery of assets located in different jurisdictions.

The materiality of country-specific geographic segment disclosures

SFAS 131 (1997) substantially changed geographic segment reporting in the United States by requiring disclosures to be made by individual foreign country when operations in an individual country are material. Although SFAS 14 (1976) provided a quantitative threshold for determining separately reportable segments, SFAS 131 provides no guidance for determining when operations in an individual country are material. In SAB 99 (1999), the SEC reminds firms that exclusive reliance on quantitative benchmarks to assess materiality is inappropriate; qualitative factors also should be considered. Using financial analysts as subjects, we conduct an experiment to examine two possible benchmarks for determining the materiality of operations in an individual foreign country: (1) the percent of total operations located in an individual country (a quantitative benchmark) and (2) the level of risk associated with the country in which the operations are located (a qualitative benchmark). The results indicate that across two regions both the magnitude of operations and the level of country risk significantly affect financial analysts’ judgments about firm risk. However, the effect that the magnitude of specific country operations has on risk assessment does not apply to countries of relatively high and relatively low risk. These results suggest that, although materiality is often evaluated in quantitative terms, the qualitative criterion of country risk may dominate in importance.

ASSESSING CURRENCY EXCHANGE RATE EXPOSURE USING GEOGRAPHIC SEGMENT DISCLOSURES: THE IMPORTANCE OF CURRENCY-SPECIFIC TYPE AND DEGREE OF EXPOSURE

Abstract This study provides descriptive evidence regarding the investors’ assessment of the currency exchange rate exposure of U.S.-based multinational enterprises. We match sample firms’ equity security returns with currency-specific exchange rate changes using their SFAS No. 14 geographic segment disclosures. Unique from prior research, we use a firm-specific longitudinal approach which allows the type and amount of currency-specific to vary. We document ample evidence of currency exchange rate exposure significantly different from zero at conventional confidence levels. Particularly, when grouped according to type of exposure (i.e. positive or negative) and in absolute value we find significant currency exposure for every currency examined. We use our results to illustrate the impact of firms natural hedging on obscuring associations between firms’ equity security returns and currency exchange rate changes and conjecture natural hedging as one explanation for modest results in extant literature.

The Predictive Ability of Geographic Segment Disclosures by U.S. Companies: SFAS No. 131 vs. SFAS No. 14

This research considers whether recent modifications to segment reporting adequately address analysts' concerns regarding the usefulness of geographic data. Forecast errors for models utilizing SFAS No. 131 geographic sales data are compared to forecast errors for models utilizing SFAS No. 14 geographic sales data. The results indicate a significant improvement in the predictive accuracy of geographic sales disclosures provided under SFAS No. 131. Additional analysis suggests this enhanced predictability may be associated with the revised requirements that companies report sales for the country of domicile and for each individually material country. Overall, our findings appear to support the FASB's argument that segment information by country is more informative and useful. Based on our findings, recommendations are presented regarding possible amendments to SFAS No. 131 that may further enhance the predictive ability of geographic segment data.

An Analysis of Segment Disclosures under SFAS No. 131 and SFAS No. 14

The purpose of this paper is to compare the segment reporting disclosures under SFAS No. 131 with those reported the previous year under SFAS No. 14. Under SFAS No. 131, firms are required to report segments consistent with the way in which management organizes the business internally. In addition, the accounting items disclosed for each segment are defined consistent with internal segment information used to assess segment performance. For many companies, this represents a significant change from the approach used to report segments under SFAS No. 14. Under SFAS No. 14, firms were required to disclose segment information by both line-of-business and geographic area with no specific link to the internal organization of the company or the measurements that were used for internal decision making. As a result, many complained that the resulting disclosures were highly aggregated and of limited use for decision-making purposes. We find that the change in segment reporting requirements under SFAS No. 131 has made a relatively significant impact on the disclosure of segment information. Over two-thirds of the sample firms have redefined their primary operating segments upon adopting SFAS No. 131. There has also been an increase in the number of firms providing segment disclosures and companies are disclosing more items for each operating segment. For enterprise-wide disclosures, the proportion of country-level geographic segment disclosures has increased, while the proportion of broader geographic area segment disclosures has decreased. However, the number of firms reporting earnings by geographic area has declined greatly as this item is no longer required to be disclosed for firms reporting on a basis other than geographic area.

Geographic segment disclosures in the United States: reporting practices enter a new era

The promulgation by the FASB of SFAS 131, Disclosures about Segments of an Enterprise and Related Information, in 1997 (FASB, 1997)(effective 1998) heralded a new era of segment reporting in the United States. The purpose of this paper is to assess the impact and effectiveness of the new standard with reference to geographic segment disclosures. Given the criticisms of its predecessor, SFAS 14, relating to segment identification and the consistency of internal and external reporting, the key issue is the extent to which companies have responded to the changes in geographic information disclosures required by SFAS 131. An empirical study of the 1997 and 1998 annual reports of US Global 1000 companies reveals mixed results. While more country specific data is disclosed and the consistency of disclosures with other parts of the annual report is increased, the problem of reporting highly aggregated geographic areas remains for a significant group of companies.

Geographic segment disclosures: Theories, findings, and implications

This article discusses both the relevant theories and the research findings on geographic segment disclosures under SFAS 14 and relates implications of these findings to the FASB/AcSB's exposure draft. Research studies on geographic segment disclosures are divided into three broad categories: predictive ability, security pricing, and risk assessment. For each category, we provide a theoretical analysis of the importance of geographic segment information and the related empirical findings. Finally, we relate potential implications for the usefulness of geographic segment disclosures to the FASB/AcSB's exposure draft, discussing both weaknesses and improvements.

The Impact of Accounting Regulatory Events Upon Earning Response Coefficients: The Case of SFAS No.8 and SFAS No.14

ABSTRACT The research empirically tests the theoretical framework developed by Holthausen and Verrecchia [1988] for investigating the association between U.S.—based MNEs' earnings and security returns through the use of SFAS Nos. 8 and 14. It provides added insight into the accounting determinants of the intertemporal and cross-sectional variation in firms' earnings response coefficients. The results of this study provide convincing evidence that a significant reduction in the association between magnitudes of unexpected earnings and magnitudes of risk-adjusted price changes occurred subsequent to the implementation of SFAS No.8. No significant change in the association between magnitudes of unexpected earnings and magnitudes of risk-adjusted price changes is observed for non-multinational firms during the same time period. The SFAS No. 14 geographic segment disclosures appear to have had no significant incremental impact upon the earnings response coefficients of U.S.—based MNEs.

The Predictive Ability of Geographic Segment Information at the Country, Continent, and Consolidated Levels

AbstractThis study examines whether geographic information disclosed at an increasingly disaggregated level (specifically, consolidated vs. continent vs. country) results in increased predictive ability of company operations (specifically, sales, gross profit, and earnings). Multinational corporations (MNCs) are formed using a simulated merger approach by combining the annual operating results of six individual firms, one from each of six countries. This approach makes it possible to compare the forecasting accuracy of data disclosed at the country, continent, and consolidated levels, not possible using current geographic segment disclosures. Previous studies using year‐ahead forecast models implicitly assume the predictive factors included in the models are significant in forecasting operating results. Using regression forecast models, this study tests whether the predictive factors included in the models are effective in forecasting operating results by examining the direction, size, and significance of the regression coefficient estimates. The coefficients provide evidence that exchange rate changes, inflation, and real GNP growth are useful in forecasting annual sales and gross profit. Whereas, at least for this sample and this time period, exchange rate changes, inflation, and real GNP growth are not significant variables in forecasting annual earnings. The results indicate that the accuracy of forecasts increase as sales and gross profit are disclosed at a more disaggregated geographic level. The hypothesized relationship between consolidated, continent, and country levels, while holding strongly under perfect foresight, holds to a lesser extent using forecasts of exchange rates, inflation, and real GNP.

Equity market benefits to disclosure of geographic segment information: An argument for decreased uncertainty

This article explores the value of releasing geographic segment information and documents empirical evidence showing that there are equity market benefits to releasing such information. The article uses an empirical capital market analysis to evaluate the disclosure practices of U.S.-based multinational firms and finds a positive relationship between the extent of geographic segment information released and the firm's equity market performance. Research into this area is important since both domestic and international standard-setting bodies have shown a renewed interest in geographic segment disclosure.