The managerial response to regulation of financial reporting for segments of a business enterprise

✍ Scribed by Frank R. Lichtenberg

• Publisher: Springer US
• Year: 1991
• Tongue: English
• Weight: 635 KB
• Volume: 3
• Category: Article
• ISSN: 0922-680X
• DOI: 10.1007/bf00135363

✦ Synopsis

To properly assess the performance and monitor the management of industrially diversified firms, investors and other stakeholders may want companies to report separate financial data for each of their lines of business. In the mid-1970s, following a major increase in diversification of American firms, private and public regulators began requiring firms to disclose financial data for individual industry segments. Company managers, however, were given the authority to determine the degree to which data reported to outsiders was disaggregated. This article examines the managerial response to segmented financial disclosure regulations. Analysis of longitudinal data reveals that the extent of segmentation in reporting has been both low and declining, relative to the true extent of industrial diversification. In 1985, the fraction of companies with more than one reported segment was only 29.7 percent, whereas the fraction of companies operating in more than one line of business (assigned more than one SIC code by Compustat) was 83.5 percent. In 1977, about half of the included companies reported at least two industry segments, and a third reported at least three; by 1987, these fractions had declined to about one-quarter and one-seventh, respectively. A potential explanation of these findings is that managers perceive minimal disclosure of segmented information to be in their own self-interest.