Real Options and the Informativeness of Segment Disclosures

38 Pages Posted: 27 Jan 1999  

Peter D. Wysocki

University of Miami - School of Business Administration

Date Written: November 1998

Abstract

This paper examines the informativeness of segment disclosures using a real-options framework. I study the relation between firm value and segment earnings when managers have options to adapt poorly-performing segments and to expand segments with investment opportunities. The segment adaptation option implies that segment losses should be less informative than segment profits about firm value. The segment expansion option implies that earnings will be capitalized at a higher rate for segments with higher investment opportunities. My empirical results are consistent with the hypotheses. This framework and supporting empirical evidence provide a direct link between the valuation and managerial-monitoring roles of segment disclosures.

JEL Classification: M41, G12, G34

Suggested Citation

Wysocki, Peter D., Real Options and the Informativeness of Segment Disclosures (November 1998). UMBS Working Paper. Available at SSRN: https://ssrn.com/abstract=141044 or http://dx.doi.org/10.2139/ssrn.141044

Peter D. Wysocki (Contact Author)

University of Miami - School of Business Administration ( email )

Department of Accounting - K/E 308
5250 University Drive
Coral Gables, FL 33146-6531
United States
305-284-8618 (Phone)

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