Managers' Motives to Withhold Segment Disclosures and the Effect of SFAS No. 131 on Analysts' Information Environment

Abstract

Using retroactive disclosures required by Statement of Financial Accounting Standards (SFAS) No. 131, we examine managers' incentives for withholding segment information under SFAS No. 14 and the impact of SFAS No. 131 on analysts' information environment for a sample of firms that previously reported as single-segment firms and initiated segment disclosure with SFAS No. 131. We examine this set of firms because they likely had the strongest incentives to withhold segment information and analysts potentially had the most to gain when these firms were forced to begin providing segment disclosures under SFAS No. 131. We find that these firms used the latitude in SFAS No. 14 to hide profitable segments operating in less competitive industries than their primary operations. However, we find no evidence to suggest that these firms used the latitude in SFAS No. 14 to mask poor performance. In contrast, our results suggest that by withholding segment information, these firms allowed themselves to appear as if they were underperforming their competition when this was not the case. Thus, their decision to withhold segment disclosures under SFAS No. 14 appears to be motivated by a desire to protect profits in less competitive industries. In terms of the impact of SFAS No. 131 on analysts' information environment, our evidence suggests that SFAS No. 131 increased analysts' reliance on public data, but we provide weak evidence to suggest that this shift may have come at the cost of a marginal increase in overall uncertainty and squared error in the mean forecast.

Is the risk of product market predation a cost of disclosure?

“…Table 3 shows that the coefficients on the linear and quadratic terms for industry adjusted leverage net of cash are 25 The mean of book leverage net of cash, without industry adjustment, is approximately 0.59 (untabulated), consistent with prior evidence that private firms are relatively more levered than public firms (Brav, 2009 variables (relative operating profitability, intangibility, market concentration, and firm size) that are widely studied in prior literature on proprietary disclosure costs (Ellis et al, 2012;Bens et al, 2011;Dedman and Lennox, 2009;Botosan and Stanford, 2005). Based on the estimation of Equation (1) in Table 3, column 6, a two standard deviation increase in relative operating profitability (intangibility) increases the likelihood of disclosure avoidance by 3.3 (1.5) percentage points, whereas a two standard deviation increase in market concentration (firm size) decreases the likelihood of disclosure avoidance by 2.0 (8.0) percentage points.…”

The effect of globalization and legal environment on voluntary disclosure

“…Though they do not consider foreign segment information, Botosan and Stanford (2005) find that, compared to segment disclosures under SFAS 131, some firms used the latitude provided in SFAS 14 to hide information about operations in industries with less competition. They conclude that firms used SFAS 14 to protect profits in these industries from new competition.…”

Is the Risk of Product Market Predation a Cost of Disclosure?

“…For example, without the financial disclosures of rivals, potential predators are less clear about the financial resources, production capacity, and time needed for predation to be successful. Thus, just as some firms have incentives to withhold disclosure to avoid other proprietary costs, such as the threat of attracting a product market copycat into a highly profitable market (e.g., Botosan and Stanford, 2005), some firms have incentives to avoid revealing information about performance or financial position to mitigate predation risk. 1 I test the effect of predation risk on disclosure decisions using data from German private firms following a 2006 regulatory change.…”