THREE ESSAYS ON OPERATING SEGMENT DISCLOSURE

This thesis contains three stand-alone essays on the operating segment disclosures that European multi-segment companies make under IFRS 8 Operating Segments. By examining various characteristics of disclosure about operating segments using manually-collected data from a range of public corporate documents, this thesis improves our collective understanding about managers’ overall disclosure strategy for financial and accounting information. The findings in each essay have practical implications for standard setters and regulators in particular, as well as for capital market investors and financial analysts. Chapter I, entitled “The Interplay between Segment Disclosure Quantity and Quality,” investigates managers’ choices with respect to both disclosure quantity and disclosure quality, and the usefulness of these two characteristics for financial analysts. Focusing on segment disclosures under the management approach, I measure quantity as the number of segment-level line items and quality as the cross-segment variation in profitability, and argue that greater managerial discretion can be exercised over quality than over quantity. I hypothesize and find that managers solve proprietary concerns either by deviating from the suggested line-item disclosure in the standard, or if following standard guidance, by decreasing segment reporting quality. Moreover, financial analysts do not always understand the quality of segment disclosures, which suggests that a business-model type of standard creates difficulties even for sophisticated users. My results inform standard setters as they start working on a disclosure framework and as they seem to consider the business model approach to financial reporting. Chapter II is entitled “Inconsistent Segment Disclosure across Corporate Documents. ” Market regulators in the U.S. and Europe investigate cases of inconsistent disclosures when a company provides different information on the same topic in different documents. Focusing on operating segments, this essay uses hand-collected data from four different corporate documents of multi-segment firms to analyze the impact of inconsistent disclosure on financial analysts’ earnings forecast accuracy. Inconsistencies that arise from further disaggregation of operating segments in some documents seem to bring in new information and increase analyst accuracy. However, when analysts must work with different, difficult-to-reconcile segmentations, their information processing capacity and forecasts are less accurate. These findings contribute to our understanding of the effects of managers’ disclosure strategy across multiple documents and have implications for regulators and standard setters’ work on a disclosure framework. Chapter III is entitled “Management Guidance at the Segment Level. ” Prior research has found that managers add information to their earnings guidance to justify, explain, or contextualize their forecasts. I identify segment-level guidance (SLG) as a type of disaggregated information that multi-segment firms provide with their management guidance, and investigate its usefulness for financial analysts’ earnings forecasting accuracy, as well as its influence on managers’ earnings fixation. I further characterize the level of precision (point and range, maximum or minimum estimate, or simply narrative) and of disaggregation of SLG. I find that companies in high tech industries known for increased uncertainty in future performance are less likely to provide SLG, and that SLG is associated with better forecasting accuracy. However, while providing more item-disaggregated SLG improves accuracy, increased precision has no impact on forecast accuracy. From the manager’s point of view, SLG creates incentives to engage in earnings management, and the more precise the SLG is the greater the incentive. In contrast, more item-disaggregated SLG discourages earnings management, perhaps by improving monitoring. In a context where qualitative, narrative, and disaggregated guidance is regarded as a solution to avoid earnings fixation and short termism, understanding which types of information achieve this goal, and how, is relevant for managers, investors, and regulators alike.