Steven J. Monahan

Discretionary Disclosure in Financial Reporting: An Examination Comparing Internal Firm Data to Externally Reported Segment Data

We use confidential, U.S. Census Bureau, plant-level data to investigate aggregation in external reporting. We compare firms’ plant-level data to their published segment reports, conducting our tests by grouping a firm’s plants that share the same four-digit SIC code into a “pseudo-segment.�? We then determine whether that pseudo-segment is disclosed as an external segment, or whether it is subsumed into a different business unit for external reporting purposes. We find pseudo-segments are more likely to be aggregated within a line-of-business segment when the agency and proprietary costs of separately reporting the pseudo-segment are higher and when firm and pseudo-segment characteristics allow for more discretion in the application of segment reporting rules. For firms reporting multiple external segments, aggregation of pseudosegments is driven by both agency and proprietary costs. However, for firms reporting a single external segment, we find no evidence of an agency cost motive for aggregation.

Financial Statement Analysis and Earnings Forecasting

I synthesize and discuss academic research on financial statement analysis and earnings forecasting. I begin by discussing analytical and empirical evidence that shows that earnings, not dividends or free cash flows, are the payoffs that investors forecast when estimating value. This result is fundamental and it provides clear motivation for studying earnings forecasting and the role that historical accounting numbers play in the earnings-forecasting process. I then provide a detailed discussion of the research design choices that are made when developing and evaluating an earnings-forecasting approach. I describe the tradeoffs involved when making these choices and I review the extant empirical literature. An overarching theme of this discussion is that there are substantial research opportunities.

The Effect of Aggregation of Accounting Information via Segment Reporting on Accounting Conservatism

Abstract In a sample of U.S. multiple-segment firms, we document a negative association between aggregation via segment reporting and timely loss recognition. A higher level of aggregation, as reflected in a firm’s reported organizational structure (the definition and characteristics of its segments), causes a multiple-segment firm to exhibit less cross-segment variation in profitability than a matched control portfolio of single-segment firms. We find that firms that engage in more aggregation report accounting numbers that provide less timely information about economic losses. We also observe that firms that provide more disaggregated segment data subsequent to adopting SFAS 131 experienced an increase in timely loss recognition. This result implies that higher quality segment reporting leads to an increase in timely loss recognition, which, per extant research, is associated with better governance. Our results complement results in Berger and Hann [2003. The impact of SFAS No. 131 on information and monitoring. Journal of Accounting Research, 41, 163–223] that show a decline in inefficient internal-capital-market transfers subsequent to the adoption of SFAS 131. Overall, we provide evidence supporting Beyer, Cohen, Lys, and Walther’s [2010. The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics, 50, 296–343] contention that accounting conservatism is, in part, a function of managers’ aggregation choices.