SYNOPSIS We investigate the economic consequences of SFAS No. 131 by evaluating whether improved segment-disclosure quality is associated with the reduction of cost of debt (as measured by bond yield spread). Based on firms' compliance with the disclosure guidance by SFAS No. 131, we construct a score that measures segment-reporting quality. The results indicate that: (1) the level of a firm's compliance with SFAS No. 131 significantly and negatively relates to bond yield spreads, and (2) the time-series variation in the level of a firm's compliance with SFAS No. 131 associates significantly and positively with bond yield spreads. More specifically, the yield spreads decrease 17.065 bps per standard deviation increase in segment-reporting quality. Overall, our findings offer direct motivation for management to commit to high-quality segment reporting.

This article examines whether the capitalization–amortization or the direct-expensing method for insurance acquisition costs and commissions better reflects the economic substance. We find that both the currently capitalized–amortized acquisition costs and the as-if asset balance of expensed commissions are positively associated with the market value of equity, and are closely related to the level and volatility of subsequent insurance premiums. Results also show that when explaining the market value of equity, the insurance commission is significantly negative if capitalized and amortized, but is insignificant if directly expensed. The authors are the first to examine how the insurance acquisition costs and commissions are related to subsequent economic benefits, and our results are consistent with IFRS 17 under which the acquisition costs shall not be immediately expensed.