An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Jong Chool Park
Rensselaer Polytechnic Institute

Abstract: This study investigates whether SFAS 131 changed the extent to which the industry-wide and firm-specific components of future earnings are reflected in current stock price. By decomposing earnings into industry-wide and firm-specific components, this paper finds that the stock market had difficulty predicting industry-related earnings for firms aggregated segments under the old rule. These firms experience significant acceleration in incorporating future earnings into current stock price on adoption of SFAS 131. However, the acceleration of future earnings is mostly driven by the improved incorporation of industry-wide components of future earnings and the market’s ability to predict firm-specific components is not changed. Supplemental analysis documents firms that increased business segment disclosure reduced geographic disclosure, suggesting that the reduced geographic information is one possible reason for lack of improvement in incorporation of firm-specific earnings.

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