We investigate the effect of the Financial Accounting Standards Board's (FASB) new segment reporting standard on the information and monitoring environment. We compare hand‐collected, restated SFAS 131 segment data for the final SFAS 14 fiscal year with the historical SFAS 14 data. We find that SFAS 131 increased the number of reported segments and provided more disaggregated information. Analysts and the market had access to a portion of the new segment information before it was made public, but analyst and market expectations were still altered by the mandated release of the new data. By increasing information disaggregation, the new standard induced firms to reveal previously “hidden” information about their diversification strategies. The newly revealed information affected market valuations and lead to changes in firm behavior consistent with improved monitoring following adoption of SFAS 131.

Lending concentration features prominently in models of information acquisition by banks, but empirical evidence on its role is limited. Using bank-level loan exposures, we find banks are less likely to collect audited financial statements from firms in industries and regions in which they have more exposure. These findings are stronger in settings in which adverse selection is acute and muted when the bank lacks experience with an exposure. Our results offer novel evidence on how bank characteristics are related to the type of financial information they use and support theoretical predictions suggesting portfolio concentration reveals a bank's relative expertise.

We study the decision to fund R&D through a separate financing organization (an ‘RDFO’) that takes the form of either a limited partnership or a corporation. The RDFO offers tax and financial reporting benefits. As a form of external funding, it also creates moral hazard and adverse selection problems (information costs). Using convertible debt as a comparative form of external funding, we find that debt-related (but not equity-related) financial reporting benefits affect the decision to form RDFOs, the evidence is mixed on whether taxes influence the formation decision, and the information costs of RDFOs restrict their use.

The authors study associations between managerial entrenchment and firms' capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross-sectional analysis, they find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, the authors find that leverage increases in the aftermath of entrenchment-reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.

We exploit the change in U.S. segment reporting rules (from SFAS No. 14 to SFAS No. 131) to examine two motives for managers to conceal segment profits: proprietary costs and agency costs. Managers face proprietary costs of segment disclosure if the revelation of a segment that earns high abnormal profits attracts more competition and, hence, reduces the abnormal profits. Managers face agency costs of segment disclosure if the revelation of a segment that earns low abnormal profits reveals unresolved agency problems and, hence, leads to heightened external monitoring. By comparing a hand-collected sample of restated SFAS No. 131 segments with historical SFAS No. 14 segments, we examine at the segment level whether managers' disclosure decisions are influenced by their proprietary and agency cost motives to conceal segment profits. Specifically, we test two hypotheses: (1) when the proprietary cost motive dominates, managers tend to withhold the segments with relatively high abnormal profits (hereafter, the proprietary cost motive hypothesis), and (2) when the agency cost motive dominates, managers tend to withhold the segments with relatively low abnormal profits (hereafter, the agency cost motive hypothesis). Our results are consistent with the agency cost motive hypothesis, whereas we find mixed evidence with regard to the proprietary cost motive hypothesis.

We study associations between managerial entrenchment and firms’ capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross-sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment-reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.

We study associations between managerial entrenchment and firms' capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross‐sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment‐reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.

We use confidential, U.S. Census Bureau, plant-level data to investigate aggregation in external reporting. We compare firms’ plant-level data to their published segment reports by grouping a firm’s plants that share the same four-digit SIC code into a “pseudo-segment.” We then determine whether each pseudo-segment is disclosed as an external segment, or whether it is subsumed into a different business unit for external reporting purposes. We show that a pseudo-segment is more likely to be aggregated when the agency and proprietary costs of separately reporting the pseudo-segment are higher and when firm and pseudo-segment characteristics allow for more discretion in the application of segment reporting rules. For firms reporting multiple external segments, aggregation of pseudo-segments is driven by both agency and proprietary costs. For firms reporting a single external segment, we find no evidence of an agency cost motive for aggregation.

Analysts are selective about which forecasts they update and, thus, convey information about current quarter earnings even when not revising the current quarter earnings (CQE) forecast. We find that (1) textual statements, (2) share price target revisions, and (3) future quarter earnings forecast revisions all predict error in the CQE forecast. We document several reasons analysts sometimes omit information from the CQE forecast: to facilitate beatable forecasts by suppressing positive news from the CQE forecast, to herd toward the consensus, and to avoid small forecast revisions. We also show that omitting information from CQE forecasts leads to lower forecast dispersion and predictable returns at the earnings announcement.