Country-Specific Sentiment and Geographic Segment Disclosure

Abstract

We examine the association between country-specific sentiment and firm geographic segment disclosure. We predict that when the American public views a foreign country unfavorably, U.S. firms adopt a “lying low” strategy and reduce disclosures about their geographic segments in that country. We find evidence consistent with this prediction on both the intensive and extensive margins. On the intensive margin, we show that when unfavorability is high, firms disclose fewer financial statement line items for segments in that country, particularly when the segment generates substantial sales and, hence, is likely to draw public scrutiny. We identify political costs, proxied by U.S. government sanctions against a foreign country and the related enforcement actions, as a mechanism. We also observe this strategy in segment profitability disclosure and segment guidance. On the extensive margin, higher country unfavorability is associated with a higher likelihood of segment aggregation, where firms provide segment disclosures for a geographic region encompassing the foreign country rather than for the country itself. 

Keywords: Segment disclosure, public sentiment, political costs, geopolitics

JEL Classification: F50, M40, M41, M48