The Shortcomings of Segment Reporting and Their Impact on Earnings Forecasts

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