Managers' Motives to Withhold Segment Disclosures and the Effect of SFAS No. 131 on Analysts' Information Environment

Posted: 18 Mar 2005

See all articles by Christine Botosan

Christine Botosan

Financial Accounting Standards Board

Mary Harris Stanford

Texas Christian University - Department of Accounting

Abstract

Using retroactive disclosures required by Statement of Financial Accounting Standards (SFAS) No. 131, we examine managers' incentives for withholding segment information under SFAS No. 14 and the impact of SFAS No. 131 on analysts' information environment for a sample of firms that previously reported as single-segment firms and initiated segment disclosure with SFAS No. 131. We examine this set of firms because they likely had the strongest incentives to withhold segment information and analysts potentially had the most to gain when these firms were forced to begin providing segment disclosures under SFAS No. 131. We find that these firms used the latitude in SFAS No. 14 to hide profitable segments operating in less competitive industries than their primary operations. However, we find no evidence to suggest that these firms used the latitude in SFAS No. 14 to mask poor performance. In contrast, our results suggest that by withholding segment information, these firms allowed themselves to appear as if they were underperforming their competition when this was not the case. Thus, their decision to withhold segment disclosures under SFAS No. 14 appears to be motivated by a desire to protect profits in less competitive industries. In terms of the impact of SFAS No. 131 on analysts' information environment, our evidence suggests that SFAS No. 131 increased analysts' reliance on public data, but we provide weak evidence to suggest that this shift may have come at the cost of a marginal increase in overall uncertainty and squared error in the mean forecast.

Keywords: segment disclosure, proprietary cost, forecast error, consensus

JEL Classification: M41, M45, D83, D84

Suggested Citation

Botosan, Christine and Stanford, Mary, Managers' Motives to Withhold Segment Disclosures and the Effect of SFAS No. 131 on Analysts' Information Environment. Available at SSRN: https://ssrn.com/abstract=677428

Christine Botosan (Contact Author)

Financial Accounting Standards Board ( email )

401 Merritt 7
PO Box 5116
Norwalk, CT 06856
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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