Abstract

http://ssrn.com/abstract=956166
 
 

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Segment Profitability and the Proprietary and Agency Costs of Disclosure


Philip G. Berger


University of Chicago - Booth School of Business

Rebecca N. Hann


University of Maryland


The Accounting Review, Forthcoming

Abstract:     
We exploit the change in U.S. segment reporting rules (from SFAS 14 to SFAS 131) to examine two motives for managers to conceal segment profits: proprietary costs and agency costs. Managers face proprietary costs of segment disclosure if the revelation of a segment that earns high abnormal profits attracts more competition and hence reduces the abnormal profits. Managers face agency costs of segment disclosure if the revelation of a segment that earns low abnormal profits reveals unresolved agency problems and hence leads to heightened external monitoring. By comparing a hand-collected sample of restated SFAS 131 segments with historical SFAS 14 segments, we examine at the segment level whether managers' disclosure decisions are influenced by their proprietary and agency cost motives to conceal segment profits. Specifically, we test two hypotheses: (1) when the proprietary cost motive dominates, managers tend to withhold the segments with relatively high abnormal profits (hereafter, the proprietary cost motive hypothesis), and (2) when the agency cost motive dominates, managers tend to withhold the segments with relatively low abnormal profits (hereafter, the agency cost motive hypothesis). Our results are consistent with the agency cost motive hypothesis, whereas we find mixed evidence with regard to the proprietary cost motive hypothesis.

Keywords: segment profitability, segment reporting, discretionary disclosure, proprietary costs, agency costs

JEL Classification: M41, M44, D82

Accepted Paper Series


Not Available For Download

Date posted: January 13, 2007  

Suggested Citation

Berger, Philip G. and Hann, Rebecca N., Segment Profitability and the Proprietary and Agency Costs of Disclosure. The Accounting Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=956166

Contact Information

Philip G. Berger
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-8687 (Phone)
773-834-4585 (Fax)
Rebecca N. Hann (Contact Author)
University of Maryland ( email )
Robert H. Smith School of Business
College Park, MD 20742
United States
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