The Effect of SFAS No. 131 on Numbers of Reported Business Segments

Users alleged that, under SFAS No. 14, many large and complex firms 'under-reported' their segments. A primary reason offered to justify this behavior was managers' desire to avoid competitive harm that supposedly would arise from disclosing sensitive segment profits to competitors, customers and suppliers. One intended consequence of SFAS No. 131 was that many firms would be required to increase the numbers of their reported segments. This paper examines the effect that adopting SFAS No. 131 had on the numbers of business segments reported by a sample of 3,735 firms. If the new standard is successful in achieving the FASB's stated goals, changes in numbers of segments should be positively associated with firm size and complexity of operations. Changes also should be positively associated with proxies for under-reporting of segments under SFAS No. 14. Alternatively, if some firms continue to under-report, changes in segments should be negatively associated with proxies for competitive harm. We find that prior under-reporting is associated with increased numbers of segments upon adoption of SFAS No. 131. Firms subject to imperfect competition, measured by an industry concentration ratio, had smaller increases in segment numbers. This evidence suggests that SFAS No. 131 has been a mixed success in achieving one of the FASB's stated goals for segment reporting