The effects of the FASB's mandated change in segment reporting rule on the value relevance of segment disclosures

This study investigates the effects of change in segment reporting rule from SFAS No. 14 to No. 131 on the value relevance of segment disclosure. To this end, two areas of the most significant differences between the old and new standard are examined: segment and segment income definition.; To examine the effects of change in segment definition on value relevance, I draw on the findings of Lamont and Polk (2001) that discount firms with negative excess value (EV) have significantly higher future excess returns than premium firms with positive EV. By using historical and restated segment data, I compute two sets of EV for the same firm at the same time and compare predictive ability for future returns. Two sets of EVs are computed in such a way that differences between them stem only from the change in segment definition from SFAS No. 14 to No. 131. Empirical results provide some support for the hypothesis that EV based on SFAS No. 131 segment disclosures provides additional information in predicting future stock returns incremental to EV based on SFAS No. 14 segment disclosures.; Segment income definition was the most controversial aspect of SFAS No. 131. Under this new standard, firms may choose and report their own definition of segment income without complying with generally accepted accounting standard as long as it is used by a chief operating decision maker for internal reporting purpose. To see whether new segment income definition improves the value relevance, I examine over-time difference in value relevance of segment income for three years before and after SFAS No. 131 became mandated. Following Francis and Schipper (1999), I operationalize value relevance by (1) measuring the market-adjusted returns that could be earned from foreknowledge of segment income and by (2) measuring the association between stock price and reportable and non-reportable segment income.; Empirical results support the hypothesis that the value relevance of segment income improves for post-SFAS No. 131 periods, compared to pre-SFAS No. 131 periods. The market-adjusted returns to the hedge portfolios formed on the foreknowledge of segment income have increased significantly during post-SFAS No. 131 periods. The results of regression test indicate that the multiple on the sum of reportable segment income for post-SFAS No. 131 periods is, as predicted, higher than for pre-SFAS No. 131 period.