| Abstract: | This study examines whether geographic segment earnings as reported under the requirements of SFAS 14 provide value-relevant information. The FASB recently issued SFAS 131, which drastically changes the segment reporting requirements for US firms. Firms are required to disclose segment information by operating segment. For those firms that define operating segments along industry lines, disclosure of geographic segment earnings is no longer required. If geographic segment earnings provide value-relevant information, a potentially valuable source of information may be lost.
In this study, geographic segment earnings coefficients are estimated by (1) regressing unexpected security returns on unexpected geographic segment earnings and (2) regressing leading-period returns on current geographic segment earnings. Leading period returns involve extending the return interval to include the returns for prior years. The results show that unexpected geographic segment earnings relate differentially to unexpected security returns. For the leading-period returns model, little significant evidence is found for the market's differential valuation of geographic segment earnings coefficients for one- and two-year return intervals. When the return intervals extend to three years or more, significant evidence is found that the market values geographic segment earnings differently, which suggests that such disclosures reflect information used by market participants in setting security prices. The FASB may want to reconsider or amend its segment reporting requirements. |
