Real Options and the Informativeness of Segment Disclosures
38 Pages Posted: 27 Jan 1999
Date Written: November 1998
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: Suggested Citation