The Impact of SFAS No. 131 Business Segment Data on the Market's Ability to Anticipate Future Earnings

Posted: 3 Feb 2005

See all articles by Michael Ettredge

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Soo Young Kwon

Korea University

David B. Smith

University of Nebraska

Paul Zarowin

New York University (NYU) - Department of Accounting

Abstract

This study investigates the effect of firms' adoption of SFAS No. 131 segment disclosure rules on the stock market's ability to predict the firms' earnings, as captured by the forward earnings response coefficient (FERC). The FERC is the association between current-year returns and next-year earnings. SFAS No. 131, effective for fiscal years beginning after December 15, 1997, arguably increased both the quantity and quality of segment disclosure. Consistent with the standard's intended qualitative effects, pre-131 multi-segment firms experienced a significant increase in FERC after adopting SFAS No. 131. Consistent with the standard's intended quantitative effects, many pre-131 single-segment firms began disclosing multiple segments, and those that did experienced an increase in FERC. However, pre-131 single-segment firms that remained single segment (i.e., were unaffected by SFAS No. 131) had no change in FERC, indicating that the increase in FERC for 131-affected firms is not due to some other event concurrent to the adoption of SFAS No. 131. These results are robust under numerous procedures that control for characteristics of the sample firms and their earnings, providing strong evidence that SFAS No. 131 resulted in an increase in stock price informativeness for affected firms. Thus, we provide the first empirical price-based evidence that SFAS No. 131 provided more information (about future earnings) to the market, as the standard's proponents have suggested.

Keywords: SFAS No. 131, segment reporting, forward earnings response coefficient

JEL Classification: G12, G14, G18, M41, M45

Suggested Citation

Ettredge, Michael L. and Kwon, Soo Young and Smith, David Brian2 and Zarowin, Paul, The Impact of SFAS No. 131 Business Segment Data on the Market's Ability to Anticipate Future Earnings. Accounting Review, Vol. 80, No. 3, July 2005. Available at SSRN: https://ssrn.com/abstract=659262

Michael L. Ettredge

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Soo Young Kwon

Korea University ( email )

#613 LG-POSCO Hall
145 Anamro, Seongbuk-Gu
Seoul, 136-701
Korea, Republic of (South Korea)
82232901937 (Phone)

David Brian2 Smith

University of Nebraska ( email )

College of Business Business Administration
Lincoln, NE 68588
United States
402-472-2927 (Phone)
402-472-4100 (Fax)

Paul Zarowin (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
422 Tisch Hall
New York, NY 10012-1118
United States
212-998-0015 (Phone)
212-995-4004 (Fax)

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