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Managerial Empire Building and Firm Disclosure
Ole - Kristian Hope,
University of Toronto
Wayne B. Thomas, University of Oklahoma
ABSTRACT. The agency cost hypothesis predicts that managers, when not monitored by shareholders, will make self-maximizing decisions which may not be in the best interest of shareholders. These decisions include aggressively growing the firm, which reduces profitability and destroys firm value. Beginning with SFAS 131, most U.S. multinational firms are allowed to no longer disclose earnings by geographic area (e.g., net income in Mexico or net income in East Asia). Such non-disclosure potentially reduces the ability of shareholders to monitor managers’ decisions related to foreign operations. Using a sample of U.S. multinationals with substantial foreign operations, we find that non-disclosing firms, relative to firms that continue to disclose geographic earnings, experience greater expansion of foreign sales, produce lower foreign profit margins, and have lower firm value in the post-SFAS 131 period. These differences do not exist in the pre-SFAS 131 period or relate to domestic operations.
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