Heterogeneous Investment Opportunities in Multiple-Segment Firms and the Incremental Value Relevance of Segment Accounting Data

51 Pages Posted: 16 Feb 2001

See all articles by Peter F. Chen

Peter F. Chen

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Guochang Zhang

University of Hong Kong

Date Written: February 2001

Abstract

Applying an option-based valuation approach, we develop and test a model that addresses the incremental value relevance of segment data beyond firm-level accounting data. Prior studies (e.g., Zhang 2000; Biddle et al. 2001) show that firm value relates to accounting data (in part) because accounting data are useful for guiding capital investment decisions that underlie value creation. In this study, we establish that the incremental value relevance of segment data relates to the heterogeneity of investment decisions across segments, as informed by segmental profitability and investment opportunities. Equity value is predicted to depend not only on aggregate firm-level accounting data but also on the extent to which segments differ in profitability and investment opportunities. Our empirical tests confirm the predicted incremental effect of segment data.

Keywords: Segment data; Incremental value relevance; Real options; Convexity of valuation function; Divergence of segment profitability

JEL Classification: G12, G31, M41, M45

Suggested Citation

Chen, Peter Fusheng and Zhang, Guochang, Heterogeneous Investment Opportunities in Multiple-Segment Firms and the Incremental Value Relevance of Segment Accounting Data (February 2001). Available at SSRN: https://ssrn.com/abstract=260553 or http://dx.doi.org/10.2139/ssrn.260553

Peter Fusheng Chen

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
School of Business & Management
Kowloon
Hong Kong PRC
852-2358-7572 (Phone)

Guochang Zhang (Contact Author)

University of Hong Kong ( email )

KK Leung Building
Faculty of Business and Economics
Hong Kong
+852 3917 1076 (Phone)

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