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Manipulation of Internal Performance Measures: Evidence from SFAS No. 131 Disclosures
Bradley Lail,
University of Oklahoma
ABSTRACT. This paper examines how managers manipulate internal performance measures after the enactment of SFAS No. 131 in 1997. Incentives such as job security and compensation place pressures on managers to meet or maintain certain levels of performance; however, no internal performance measures were available for researchers to examine prior to SFAS No. 131. The “through the eyes of management” approach required by the pronouncement for segment performance disclosures makes internal performance measures previously unknown to financial statement users now observable. I use the sum of a firm’s segments as a proxy for internal performance measures, and find that these measures are manipulated in the post-131 period but not pre-131. Either internal performance measures have always been managed and researchers can now observe this behavior due to SFAS No. 131, or there is a temporal shift in managing internal performance measures around the pronouncement.
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