Reporting practice and economic consequences
1.1Research questions and objectives
Understanding the business of multinational and diversified entities is challenging for users of financial statements, especially in light of ongoing globalization and the associated growth of foreign operations. Until the 1970s and early 1980s, investors and other users of financial reporting had to subsist on aggregated financial statements. Considering that firms engage in business activities in different industries and that multinational entities face diverse economic and political environments, aggregated financial disclosures as a single source of information may conceal important facts and prevent a thorough financial analysis. Segment reporting – which can be defined as the disaggregation of financial information of an entity’s business operations by business lines, geographical areas or major customers – can help to overcome the shortcomings of financial statements.
On the one hand, segmental disclosures assist users to take the varying profitability, growth opportunities and risk of different business operations into account. This potentially enhances the users’ ability to assess an entity’s future development. In fact, empirical research has shown that segmental disclosures lead to improved earnings forecasts (e.g., Kinney (1971); Kochanek (1974); Collins (1975); Emmanuel/Pick (1980); Silhan (1983); Baldwin (1984); Roberts (1989); Balakrishnan et al. (1990); Swaminathan (1991); Berger/Hann (2003); Ettredge et al. (2005)). Moreover, numerous studies provide evidence that the availability of segment information affects investors’ risk assessments and leads to a reduction in systematic risk (e.g., Collins/Simonds (1979); Ajinkya (1980); Prodhan (1986); Prodhan/Harris (1989); Dupnik/Rolfe (1990)). Furthermore, there is plenty of evidence that segment...
You are not authenticated to view the full text of this chapter or article.
This site requires a subscription or purchase to access the full text of books or journals.
Do you have any questions? Contact us.Or login to access all content.