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Following SFAS No. 131, do firms’ segment definitions more faithfully represent their internal organizational designs?. Why this question? Representational faithfulness is a key qualitative characteristic of accounting. Elevated to a primary characteristic in the new conceptual framework.

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Why this question?

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  1. Following SFAS No. 131, do firms’ segment definitions more faithfully represent their internal organizational designs? Why this question? • Representational faithfulness is a key qualitative characteristic of accounting. • Elevated to a primary characteristic in the new conceptual framework. • Little research evidence regarding representational faithfulness of firms’ disclosures. Why this context? • Research in strategy and finance provides a theoretically supported approach for capturing the underlying economics of the business activities segment disclosure intends to convey. • Important objective of SFAS No. 131 was to enhance the faithful representation of firms’ segment disclosures.

  2. Prior Research SFAS 14: Industry approach. • Motives other than faithful representation influenced segment definitions. • E.g. exposure to proprietary and/or agency costs. (Harris 1998, Botosan and Stanford 2005, Berger and Hann 2007) SFAS 131: Management approach. • Greater disaggregation and more information. • Hermann and Thomas 2000, Berger and Han 2003. • Greater consistency with other parts of 10-k (e.g. MD&A). • Street et. al 2000.

  3. Research Design • Strategy and finance literature suggest that relatedness of operations is a critical dimension of optimal structuring of business activities. • Key assumption. • Firms organize operations internally to maximize firm value. • Examine firms’ segment grouping choices before versus after SFAS No. 131. • Four types of firms. • Change firms: single-multi and multi-multi. • No-change firms: single-single, multi-multi. • Examine relationships within and across segments.

  4. Hypotheses 1, 2 & 3 Hypotheses 4, 5 & 6 Within Segment Analysis • Among operations grouped as segments, there is a significant increase in: • Industry relatedness. • Similarity of competitive environments. • Similarity of growth opportunities. Across Segment Analysis • Across segments, there is a significant increase in the diversity of: • Operating activities (i.e. a decrease in relatedness). • Competitive environments. • Growth opportunities.

  5. Within Segment Analysis of a Single_Multi Firm Secondary Primary Across Segment Analysis of a Multi_Multi Firm

  6. Comparing Change Firms to No Change Firms mean values shown

  7. Overall Conclusions • For firms that changed their segment definitions. • Managers alter groupings to more faithfully represent their internal organizational design. • Single-multi change firms took greatest advantage of flexibility under SFAS 14, but under SFAS 131 provide relatively most representationally faithful disclosures. • For firms that did not change their segment definitions. • Post –SFAS 131, lag behind change firms in providing segment definitions that parallel their presumed internal organizational structure.

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