Segment Earnings Research Articles

Do Reconciliations Of Segment Earnings Affect Stock Prices?

While SFAS No. 131 is intended to increase the transparency of financial reporting using a management approach, it may reduce shareholders ability to interpret segment disclosures relative to the industry approach employed under SFAS No.14. This study investigates whether segment reconciliation differences affect stock prices and whether abnormal returns can be earned using information about two components of earnings: aggregated segment earnings and segment earnings reconciliations. We compute reconciliations as the difference between firm-level consolidated earnings and aggregated segment-level earnings. Firms that report negative SERs have greater sales and profitability, greater return on equity, as well as more operating cash flows and firm growth. This suggests that firms that report aggregated segment earnings greater than firm-level consolidated earnings may be better off financially. Our findings show that mispricing does occur when firms report positive SERs by the market, underestimating the segment earnings reconciliation component of earnings persistence. Investors can also earn positive abnormal returns when investors take a long (short) position with the portfolio with the highest (lowest) absolute SERs. On the contrary, we find investors earn negative abnormal returns when firms report negative SERs. Collectively, this study provides evidence that mispricing occurs and that investors over/underestimate the importance and/or persistence of segment earnings reconciliations.

A Literature Review on the Value Relevance of Geographic Segment Earnings

A Literature Review on the Value Relevance of Geographic Segment Earnings

Discretionary Allocation of Corporate Income to Segments: Effects on the Persistence and Price-Relevance of Aggregated Segment Income

Under a controversial provision of FAS 131, the sum of a company’s segment earnings need not equal corporate net income, nor is it required to equal any corporate earnings sub-total, such as operating income (however defined). We refer to the difference between summed segment earnings and corporate-level income, when it exists, as the ‘Gap’. This study examines the determinants and consequences of Gaps. The results suggest that Gaps shield segment-level managers from risk by excluding transitory income items from segment earnings, and by excluding income items arising from decisions not made at the segment level. We also find evidence that companies facing high proprietary costs and agency costs are likely to exhibit higher Gaps. We investigate the effects of signed Gaps by subtracting aggregated segment income from corporate income. When Gaps exist (corporate earnings differ from summed segment earnings), summed segment earnings is modestly more persistent than are corporate earnings. This difference appears to be attributable to negative Gaps. When negative Gaps exist, aggregated segment earnings are more informative (in terms of its association with concurrent stock returns) than are corporate earnings. Our results suggest that aggregated segment income is incrementally useful to investors when companies disclose negative Gaps.

Strategic Revelation of Differences in Segment Earnings Growth

Prior studies have theoretically and empirically documented that incentives to disclose information involve a trade-off between the benefits to the corporation of reducing information asymmetry and the costs of revealing proprietary information. This study investigates the interplay of managers’ motives to conceal versus reveal cross-segment differences in earnings growth in multi-segment firms. We find that revealed segment earnings growth differences are negatively associated with proxies for proprietary costs and agency costs, and positively associated with firms’ reliance on external financing. We also find that SFAS No. 131 improved the quality of segment information by requiring or allowing revelation of greater cross-segment differences in earnings growth.

The Impact of Nondisclosure of Geographic Segment Earnings on Earnings Predictability

We address whether nondisclosure of geographic segment earnings after implementation of Statement of Financial Accounting Standards No. 131 (SFAS 131) has an impact on the earnings predictability of multinational companies. An understanding of how nondisclosure of accounting information affects the predictability of a firm's earnings will be of importance to financial statement users, managers, auditors, and standard setters. The quality of geographic disclosures is especially important as foreign operations represent a growing portion of many U.S. multinational companies and these operations can vary considerably on risk and return characteristics. Prior research has focused almost exclusively on issues involving line of business segment reporting after implementation of SFAS 131. However, SFAS 131 has noticeably affected geographic earnings disclosures. Firms that define their operating segments on any basis other than geographic area are no longer required to disclose geographic earnings. We find that nondisclosure of geographic earnings has no effect on analysts' forecast accuracy or dispersion. We conclude that the Financial Accounting Standards Board's decision to no longer require disclosure of geographic earnings for secondary segments has not hampered users' ability to predict earnings of U.S. multinational companies.

THE USEFULNESS OF GEOGRAPHIC SEGMENT DISCLOSURE FOR U.S.-BASED MNCs OPERATING IN EMERGING MARKETS

The current accounting rules no longer require detailed disclosure of geographic segment information, in particular geographic segment earnings. This study uses a sample of U.S.-based multinational corporations operating in emerging markets and finds that geographic segment data are relevant for shareholders. We find these data help to characterize exchange rate exposure, explain residual stock returns, and discern differences in earnings quality.

International differences in disclosure adequacy: Empirical evidence from annual reports of French and Chinese listed firms

The adequacy of information disclosure by a company in its annual report depends on the local circumstances. By comparing the annual reports of large French and Chinese listed companies, this paper shows that in comparison with their Chinese counterparts, French listed companies are more user-friendly as regards information demands. French annual reports are bigger in volume and fuller in content, while Chinese annual reports tend to be more homogeneous both in volume and content. As far as the depreciation period for fixed assets is concerned, except for buildings, which have a similar depreciation period in both countries, French companies apply significantly shorter depreciation periods for their industrial equipment, tools, transport equipment and furniture. Regarding disclosure adequacy, French firms publish more information about their technological innovations, corporate stock, segment earnings and revenues, indebtedness and environmental protection, whereas Chinese companies place more emphasis on the disclosure of future trends and prospects. All these characteristics are consistent with the major economic and cultural differences between China and France.

The Value‐relevance of Geographic Segment Earnings Disclosures Under SFAS 14

This study examines whether geographic segment earnings as reported under the requirements of SFAS 14 provide value‐relevant information. The FASB recently issued SFAS 131, which drastically changes the segment reporting requirements for US firms. Firms are required to disclose segment information by operating segment. For those firms that define operating segments along industry lines, disclosure of geographic segment earnings is no longer required. If geographic segment earnings provide value‐relevant information, a potentially valuable source of information may be lost.In this study, geographic segment earnings coefficients are estimated by (1) regressing unexpected security returns on unexpected geographic segment earnings and (2) regressing leading‐period returns on current geographic segment earnings. Leading period returns involve extending the return interval to include the returns for prior years. The results show that unexpected geographic segment earnings relate differentially to unexpected security returns. For the leading‐period returns model, little significant evidence is found for the market's differential valuation of geographic segment earnings coefficients for one‐ and two‐year return intervals. When the return intervals extend to three years or more, significant evidence is found that the market values geographic segment earnings differently, which suggests that such disclosures reflect information used by market participants in setting security prices. The FASB may want to reconsider or amend its segment reporting requirements.

Real Options and the Informativeness of Segment Disclosures

This paper examines the informativeness of segment disclosures using a real-options framework. I study the relation between firm value and segment earnings when managers have options to adapt poorly-performing segments and to expand segments with investment opportunities. The segment adaptation option implies that segment losses should be less informative than segment profits about firm value. The segment expansion option implies that earnings will be capitalized at a higher rate for segments with higher investment opportunities. My empirical results are consistent with the hypotheses. This framework and supporting empirical evidence provide a direct link between the valuation and managerial-monitoring roles of segment disclosures.

The Effect of Exchange Rate Changes on Geographic Segment Earnings of U.S.‐Based Multinationals

AbstractThis study examines the ability of exchange rate changes to aid in the explanation and prediction of the geographic segment earnings of U.S.‐based multinational corporations. In order to evaluate the potential usefulness of geographic segment earnings disclosures, it is important to understand the effect that currency changes should be expected to have on these earnings. Two types of exchange rate effects are examined. These include the mechanical translation effects of an exchange rate change, as well as the operating effects. A sample of geographic segment earnings disclosures is developed for two geographic locations (Canada and Europe) and six industries in which adequate country‐industry specific subsamples can be identified. Because the factors that impact exchange rate exposure tend to depend on country, industry, or both, provision is made for country, industry, and country‐industry specific sensitivity to currency changes. Regressions and nonparametric analyses are performed to determine whether exchange rate changes can help explain the geographic segment earnings within these samples. Results indicate that the accounting‐based translation effect that is typically modeled as the impact of exchange rate changes on earnings does not adequately capture the effect of exchange rate changes on segment earnings. Operating effects of past and current exchange rate changes do help explain earnings for geographic segments located in Europe and in four industries. Prediction models which are country or country‐industry specific are able to outperform a random‐walk prediction of geographic segment earnings in some circumstances.

Forecasting Earnings Using Geographical Segment Data: Some UK Evidence

AbstractThis study examines the question of whether or not the geographical segment data disclosed by UK companies can be used to generate forecasts of earnings that outperform forecasts based upon past consolidated data. One year ahead forecasts of attributable earnings or net income before extraordinary items are generated for both geographical sales data combined with a consolidated attributable earnings to sales margin and segmental earnings data. The forecasts are based upon forecasts of changes in the GNP of individual countries, both with and without the addition of forecasted inflation rates. It is found that models based upon both geographical segment sales and segment earnings outperform the random walk and random walk plus drift consolidated models for the years 1981 to 1983. The difference in the sizes of the errors generated by the segment data based models and the consolidated data based models are significant in the majority of cases especially when the errors are truncated at 100%. However, there is no additional advantage in terms of forecast accuracy in using segment earnings data rather than segment sales data.