Implications of Proposed Segment Reporting Standards for Financial Analysts? Investment Judgments

Journal of Accounting Research, Vol 35, Supplement, 1997

Posted: 10 Feb 1998

See all articles by Laureen A. Maines

Laureen A. Maines

Indiana University - Kelley School of Business - Department of Accounting; PricewaterhouseCoopers

Linda S. McDaniel

University of Kentucky - Von Allmen School of Accountancy

Mary Harris Stanford

Texas Christian University - Department of Accounting

Abstract

This paper reports results from an experiment which provide evidence on how certain provisions of current and revised segment reporting standards affect financial analysts? judgments. Specifically, we examine the effect of two alternative approaches to segment definition: segments defined by grouping similar products (similarity approach) and segments defined by a company?s internal reporting classification (management approach). The first approach is used currently under SFAS No. 14 as the basis for determining externally-reported segments, while the second approach will be used after December 15, 1997, the effective date of the FASB?s new segment reporting standard, SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Results show that analysts perceived segment reporting to be more reliable when similar products were combined in a segment (SFAS No. 14) than when dissimilar products were combined, and when external segments were the same as those used internally (SFAS No. 131) than when external and internal segments differed. Analysts? confidence in their earnings forecasts and stock valuation judgments was affected by the interaction of the similarity and management approaches. As long as external segments were the same as internal segments, analysts? confidence was not affected by whether products combined in a segment were similar or dissimilar. In contrast, if external and internal segments differed, analysts had greater confidence in their judgments when similar products were combined in a segment than when dissimilar products were combined. These results support the FASB?s position that the management approach will positively affect analysts? perceptions of the reliability of segment data. In addition, our results suggest that, in certain cases, the management approach will enhance analysts? confidence in reported segment data.

JEL Classification: C91, M41, M45, G29

Suggested Citation

Maines, Laureen A. and McDaniel, Linda S. and Stanford, Mary, Implications of Proposed Segment Reporting Standards for Financial Analysts? Investment Judgments. Journal of Accounting Research, Vol 35, Supplement, 1997, Available at SSRN: https://ssrn.com/abstract=58508

Laureen A. Maines (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2611 (Phone)
812-855-4985 (Fax)

PricewaterhouseCoopers

1301 Avenue of the Americas
New York, NY 10019
United States

Linda S. McDaniel

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Mary Stanford

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7483 (Phone)

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