Review of Quantitative Finance and Accounting, 18: 323–344, 2002
2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
Security Market Effects Associated with SFAS No. 131:
Reported Business Segments
University of Kansas, Division of Accounting and Information Systems, Lawrence KS Tel.: 785-864-7537
SOO YOUNG KWON
Korea University, Department of Accounting, Seoul, Korea
Iowa State University, Department of Accounting, Ames, IA 50011, USA Tel.: 515-294-4668
Abstract. In this study we examine the economic impact of the expected shift from the FASB’s segment reporting
requirements found in SFAS No. 14 to those found in SFAS No. 131. SFAS No. 131 was the joint effort of the
United States’ FASB and Canada’s Accounting Standards Board (AcSB). It requires ﬁrms to report segments based
on the ﬁrm’s internal reporting and management arrangements (the management method) rather than on SFAS
No. 14’s line-of-business method. One alleged deﬁciency with the line-of-business method is its ﬂexibility that
allowed companies to combine segments. Analysts complained that companies abused this ﬂexibility to conceal
information. The management method allegedly is less ﬂexible because companies must report segments externally
the same way that they manage them internally. We examine the economic impact of the reporting standard shift by
ﬁrst developing company variables related to the alleged concealment of information under SFAS No. 14. These
variables help us to explore why companies combine business segments under the line-of-business method and
what costs companies are expected to incur when they are forced to implement the management method. Next we
identify a series of dates that chronicle when the market received information about the content of SFAS No. 131.
Results of the stock return tests suggest that SFAS No. 131 had a signiﬁcant impact on ﬁrms that previously had
the greatest incentives to conceal segment information, consistent with the conjecture that the standard imposed
unanticipated costs on affected ﬁrms.
Key words: information asymmetry, segmental disclosure, capital markets, regulation
JEL Classiﬁcation: C21, D81, D82, G38, M41
This study’s purpose is to examine the economic impact of the Financial Accounting Stan-
dard Board’s (FASB) proposal that companies change to segment reporting requirements
found in Statement of Financial Accounting Standard (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 represents the joint effort
Address correspondence to: David Smith, Iowa State University, 396 Carver Hall, Ames, IA 50011.
Tel.: 515-294-4668; Fax: 515-294-3525. E-mail: email@example.com