The Impact of Nondisclosure of Geographic Segment Earnings on Earnings Predictability

Abstract

We address whether nondisclosure of geographic segment earnings after implementation of Statement of Financial Accounting Standards No. 131 (SFAS 131) has an impact on the earnings predictability of multinational companies. An understanding of how nondisclosure of accounting information affects the predictability of a firm's earnings will be of importance to financial statement users, managers, auditors, and standard setters. The quality of geographic disclosures is especially important as foreign operations represent a growing portion of many U.S. multinational companies and these operations can vary considerably on risk and return characteristics. Prior research has focused almost exclusively on issues involving line of business segment reporting after implementation of SFAS 131. However, SFAS 131 has noticeably affected geographic earnings disclosures. Firms that define their operating segments on any basis other than geographic area are no longer required to disclose geographic earnings. We find that nondisclosure of geographic earnings has no effect on analysts' forecast accuracy or dispersion. We conclude that the Financial Accounting Standards Board's decision to no longer require disclosure of geographic earnings for secondary segments has not hampered users' ability to predict earnings of U.S. multinational companies.