Can Enhanced Segment Comparability Reduce Firm Value? The Moderating Role of Competitor Orientation and Segment-Specific Information

• In Event: Comparability of Financial Statements

Abstract

Concerns regarding insufficient comparability and a lack of detailed information in segment disclosures prompted the Financial Accounting Standards Board to undertake “the segment reporting project” (FASB [2019b]). This study examines how enhanced segment-level comparability affects managers’ operational decisions, and whether this effect varies with managers’ competitor orientation and the reporting of additional segment-specific information. Our results indicate that enhanced segment comparability causes managers who are more competitor oriented to focus on outperforming competitors at the segment level, resulting in operational distortion that decreases overall firm value. While additional segment-specific information does not affect more competitor-oriented managers’ decisions, less competitor-oriented managers only engage in operational distortion when more comparable segment disclosures report additional segment-specific information. Our findings suggest that enhanced segment comparability and additional segment-specific disclosures could harm firm value and inform regulators about potential unintended consequences of proposed changes to the current segment reporting standard.

Authors

• Chezham Leon Sealy, University of Alabama

• Ying Wang, University of Massachusetts-Amherst

• Yao Yu, University of Massachusetts-Amherst