The Shortcomings of Segment Reporting and Their Impact on Earnings Forecasts

46 Pages Posted: 30 Jan 2019 Last revised: 14 Aug 2023

See all articles by Robert Gutsche

Robert Gutsche

University of St. Gallen - School of Finance; ZHAW School of Management and Law

Alexandru Rif

University of St. Gallen - School of Finance; ZHAW School of Management and Law

Date Written: August 1, 2022

Abstract

In this paper, we deliver US-sample based evidence that segment reporting biases analysts’ earnings per share (EPS) forecasts. We show that the error in EPS forecasts corresponds to a profitability “gap” between profitability aggregated from segment reporting and profitability computed from consolidated financial statements. We show that the forecast error is associated with the profitability gap when segments lack major profitability components such as assets, revenue, or operating income. We find that the EPS forecast error increases with increased segment disaggregation when controlling for cross-industry diversification, suggesting that disaggregation per se does not improve the ability of analysts to forecast earnings.

Keywords: ASC 280 (SFAS 131), IFRS 8, Forecast Accuracy, Segment Reporting

JEL Classification: M41, M10, M21, M41, G32

Suggested Citation

Gutsche, Robert and Rif, Alexandru, The Shortcomings of Segment Reporting and Their Impact on Earnings Forecasts (August 1, 2022). Available at SSRN: https://ssrn.com/abstract=3318106 or http://dx.doi.org/10.2139/ssrn.3318106

Robert Gutsche (Contact Author)

University of St. Gallen - School of Finance

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

ZHAW School of Management and Law ( email )

St.-Georgen-Platz 2
Winterthur, 8401
Switzerland

Alexandru Rif

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

ZHAW School of Management and Law ( email )

St.-Georgen-Platz 2
Winterthur, 8401
Switzerland

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