Which of These is Not Like the Other? The Role of Segment Reporting Differentiation in Determining Firm Value

Abstract

This study examines a firm’s excess value based on segment reporting for the firm and its peer group. Firms often operate in industry segments not reported by peers. When such operating segments are reported separately, the assessed covariance between the focal firm’s cash flows and those of its peers is reduced. As a result, I hypothesize that a larger difference in reported operating segments between the focal firm and its peer group increases the focal firm’s excess value. Additionally, when a peer group reports greater differences in operating segments, the focal firm will benefit from increased differentiation between firms in the peer group, also increasing focal firm excess value. Using peer groups based on product descriptions from Form 10-K filings, I construct a measure of segment reporting differentiation and find evidence consistent with my expectations. I also find the effects of reporting differentiating segment are more pronounced after an increase in mandatory disclosure precision (ASC 280), suggesting possible externalities due to increased mandatory reporting requirements. Overall, results are consistent with the idea that higher levels of differentiation by the focal firm and by peers reduce correlations between firms, affecting the focal firm’s excess value.