Managers’ Segment Financial Reporting Choice: An Analysis Of Firms’ Segment Reconciliations
Journal of Applied Business Research, Vol. 28, No. 6, November/December 2012
63 Pages Posted: 7 Apr 2011 Last revised: 7 Mar 2013
Date Written: May 13, 2011
Abstract
Under SFAS No. 131, a company is required to provide a reconciliation of the total of the reportable segments’ profit or loss to the firm’s consolidated income. This paper investigates these segment disclosures and related determinants of managers’ segment financial reporting choices. We focus on managers’ decisions to report segment-to-firm level reconciliations (i.e., segment reconciliations (SERs)) – differences between firm-level and aggregated segment-level earnings. On average, we find that SERs are significant when the differences are not equal to zero. Firms with higher agency costs and greater accruals are less likely to report segment reconciliations. However, firms that have a greater number of segments, larger firms, and firms with higher leverage, losses, and greater earnings volatility are more likely to report SER≠0. Consistent with managers having some segment reporting discretion, our overall findings suggest a manager’s segment reporting choice is partly driven by agency costs. Interestingly, among firms with reported segment reconciliations, firms with higher agency costs are more likely to report positive SERs. Consequently, this study documents a relation between proxies for agency costs and managers’ decisions to report segment reconciliations. Policy implications and suggestions for future research are discussed in the paper.
Keywords: SFAS No. 131, Segment Reconciliation, Segment Reporting, Determinants, GAP
JEL Classification: M41
Suggested Citation: Suggested Citation
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