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Segment Reporting under IFRS 8

Reporting practice and economic consequences


Martin Nienhaus

The adoption of IFRS 8 marked a major change in the segment reporting rules under IFRS. This step, however, was heavily criticized and several questions regarding IFRS 8 still remain unanswered. Therefore, this study analyzes the impact of IFRS 8 on segment reporting practice and its economic consequences. The results show that firms report on average more segment information. Moreover, segment reports from the management’s perspective are useful and mitigate information asymmetries, reduce the cost of capital and affect the work of financial analysts. The findings have implications for the IASB, preparers, auditors and users of financial statements as well as enforcement institutions.
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4. Theory and hypotheses development


4Theory and hypotheses development

This chapter lays the theoretical foundation of this study and derives hypotheses. First, the principal agent theory and the efficient market hypothesis are introduced. They provide the underlying framework and justification for the subsequent discussion of the link between disclosures and the three capital market perspectives. Second, the impact of introducing the segment report to the decision usefulness of segment information is discussed. Based on this, hypotheses for the expected change in segment reporting practices and the economic consequences are derived.

4.1Theoretical foundation

4.1.1Fundamental theories agent theory

The principal agent theory was developed by Jensen/Meckling (1976). It is part of the new institutional economics31 and deals with the relationship in which one party (i.e., the principal) delegates work to another party (i.e., the agent), who carries out that work (Eisenhardt (1989), p. 58).

There are two branches in the agency theory literature. First, positivist agency literature identifies constellations in which principals’ and agents’ objectives are incompatible and derives mechanisms to limit potential malbehavior of agents with a particular focus on the shareholder management relationship. This branch is more empirically-focused. Second and in contrast, normative principal agency literature is broader, more abstract as well as mathematical. It is based on microeconomics and deals with the maximization of individual utility functions. Normative principal agency literature is non-empirical (Richter/Furubotn (2010), p. 176). This study is based on the positivist agency literature since it uses a positive...

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