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

Posted: 21 Jan 2003

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

Abstract

Applying a real-options 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, Chen and Zhang 2001) show that equity valuation requires accounting data (in part) because accounting provides signals that guide capital investments underlying value creation. In this study, we establish that the usefulness of segment data beyond aggregate data relates to heterogeneity of investment opportunities across segments, caused by divergences of segment profitability and growth potential. Empirical results are consistent with the model's predictions. We also assess the magnitude of the valuation impact of segment information relative to that of firm-level information.

Keywords: segment accounting data, incremental value relevance, real options, divergence of profitability, segment growth opportunity

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. The Accounting Review, April 2003. Available at SSRN: https://ssrn.com/abstract=351960

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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