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Abstract:Our study assesses whether SFAS No. 131 improved disclosure about the diversity of multiple segment firms' operations. We find a post-SFAS No. 131 increase in cross-segment variability of segment profits, an increase in the association between reported and inherent cross-segment variability, and an increase in association between reported variability and capital market incentives to disclose. We interpret the results as evidence that SFAS No. 131 increased the transparency of segment profitability disclosures, and as indicating SFAS No. 131 allowed firms depending more on external financing to disclose more about differences in segment profitability. To determine whether the increase in cross-segment profit variability is attributable to the adoption of SFAS No. 131 and to provide a basis for testing our remaining hypotheses, we develop and test models that include variables proxying for other factors that could affect the cross-segment variability of reported profits: the cross-segment variability that would exist absent incentives to conceal differences (inherent variability), proprietary costs, and market incentives to reveal value-relevant segment differences. The inclusion of proprietary cost variables is prompted by previous research (e.g., Harris 1998; Berger and Hann 2003b), which shows that firms with higher proprietary costs report fewer segments. It also is motivated by the often-stated claim that companies that disclose additional segment information suffer competitive harm (Taub 2004). The inclusion of variables for market incentives is motivated by insights from Chen and Zhang (2003) and analysis of the incentives firms needing external financing have to disclose value relevant information (Frankel et al. 1995).H2 is based on the premise that a reported profit measure is more transparent if it is more strongly, and positively, associated with a measure of the inherent ('true') cross-segment variability of profits. Our primary proxy for the latter is the cross-segment profit variability of Comparison of the coefficients of a variable reflecting a firm's need for external financing shows that the positive association between need for external financing and crosssegment profit variable is more positive after SFAS No. 131. This is consistent with firms that depend more on external financing disclosing more about differences in operating profitability after SFAS No. 131, and also with H4.Our results are robust to experimentation with interacting variables representing competing incentives to conceal (reveal) differences in segment profitability, with elimination of high net loss segments, with adjustments to the dependent variable (cross-segment profit variability) to control for the effects of differences in segment size, and to use of different operationalizations of explanatory variables.The remainder of the paper is organized into five additional sections. Section 1 provides background. Section 2 develops hypotheses, explains variable measurement, and No. 131. In this section we also expla...

Abstract:Motivated by calls for increased compliance, size-based regulation, and continued exemption of small firms from internal control reporting requirements, we assess the incremental effects of firm size, corporate governance quality, and bad news on disclosure compliance. We examine compliance with the disclosure requirements of an SEC-mandated filing that requires no computations or complex judgments, but is non-routine and may reveal value-decreasing information (i.e., bad news) that otherwise would not become public. The disclosures studied are those that firms provide in Form 8-K Item 4 when changing external auditors. We find that non-compliant firms have lower quality corporate governance and less need for external financing, but are not smaller than compliant control firms. Additional analyses indicate that compliance is negatively associated with bad news. Electronic copy available at: http://ssrn.com/abstract=955922The effects of firm size, corporate governance quality, and bad news on disclosure compliance Abstract Motivated by calls for increased compliance, size-based regulation, and continued exemption of small firms from internal control reporting requirements, we assess the incremental effects of firm size, corporate governance quality, and bad news on disclosure compliance. We examine compliance with the disclosure requirements of an SEC-mandated filing that requires no computations or complex judgments, but is nonroutine and may reveal value-decreasing information (i.e., bad news) that otherwise would not become public. The disclosures studied are those that firms provide in Form 8-K Item 4 when changing external auditors. We find that non-compliant firms have lower quality corporate governance and less need for external financing, but are not smaller than compliant control firms. Additional analyses indicate that compliance is negatively associated with bad news.

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