Do Accounting Standards Matter? An Examination of the Impact of SFAS No. 131 Segment Disclosures on Stock Price

• In Event: Financial Reporting and Capital Market

Abstract

This paper investigates whether the FASB’s (1997) regulatory intervention—Statement of Financial Accounting Standards No. 131: Reporting Disaggregated Information about a Business Enterprise and Related Information influence investors’ valuation of foreign fixed assets and foreign sales. We find that both foreign assets and foreign sales are significantly positively associated with stock price and that the coefficients on foreign assets and foreign sales are significantly large post-SFAS 131 than pre-SFAS 131. That is, foreign assets and foreign sales are more incrementally priced post-SFAS 131. These results persist after controlling for other factors affecting firm value. These findings suggest that the disclosure mandated by the FASB’s (1997), enhances overall disclosure quality related to foreign operations and as a result makes it easier for investors to exercise their ownership rights in an informed basis. In particular, they support the view that SFAS No. 131 appears to be an important standard for management to communicate valuable segment information to the benefit of investors. Overall, these findings suggest that pricing of foreign assets and foreign sales are related to the firms’ information environment.

Author

• Kingsley O Olibe, Kansas State University