The Impact of SFAS No. 131 on Information and Monitoring

We investigate the effect of the Financial Accounting Standards Board’s (FASB) new segment reporting standard on the information and monitoring environment. We compare hand-collected, restated SFAS 131 segment data for the final SFAS 14 fiscal year with the historical SFAS 14 data. We find that SFAS 131 increased the number of reported segments and provided more disaggregated information. Analysts and the market had access to a portion of the new segment information before it was made public, but analyst and market expectations were still altered by the mandated release of the new data. By increasing information disaggregation, the new standard induced firms to reveal previously “hidden” information about their diversification strategies. The newly revealed information affected market valuations and lead to changes in firm behavior consistent with improved monitoring following adoption of SFAS 131. ∗Graduate School of Business, University of Chicago; †Leventhal School of Accounting, University of Southern California. Earlier versions of this paper were circulated using Rebecca Hann’s previous surname of Tsui. We thank IBES Inc. for providing the analyst forecast data and James Chan, Steffi Chan, Jae Kim, and Pierre Sato for their capable research assistance. This study has benefited greatly from the comments of Joe Piotroski (the referee) and from comments by David Aboody, Ray Ball, Mary Barth, Dan Bens, Larry Brown, John Core, Wayne Guay, Il-Horn Hann, Doug Hanna, Carla Hayn, Jack Hughes, Rick Lambert, Richard Leftwich (editor), Christian Leuz, Jing Liu, Thomas Lys, Steve Monahan, Peter Knutson, S. P. Kothari, Phil Stocken, Jake Thomas, Ro Verrecchia, and workshop participants at the University of Chicago, University of Pennsylvania, UCLA, and the 2002 JAR Conference.