Segment Earnings Reporting and Managerial Incentives: Evidence from Foreign Firms Cross-Listed in the U.S.

• In Event: International Accounting

Abstract

SFAS 131 allows segment earnings to be reported using non-GAAP measurements while consolidated firm-level earnings must be reported with GAAP measurements, thus a gap may exist between firm-level earnings and the sum of segment earnings (hereafter referred to as the earnings gap). Prior studies find that U.S. firms with managerial incentives may manipulate the earnings gap to obscure higher performing segments to competitors or to hide underperforming segments to external monitors. This study complements extant research by examining the association between managerial incentives and segment earnings reporting of foreign firms cross-listed in the U.S. and the impact of country-level characteristics on this association. We find that 1) cross-listed firms with higher proprietary costs demonstrate less manipulation in segment earnings reporting and 2) that among cross-listed firms with agency costs, firms in weak rule of law countries demonstrate more manipulation in segment earnings than firms in strong rule of law countries.

Authors

• Fangjun Sang, Kent State University - Kent

• Pervaiz Alam, Kent State University

• Timothy Paul Hinkel, Kent State University - Kent