The impact of SEC mandated segment data on price variability and divergence of beliefs.

Abstract This study provides empirical evidence on the economic effects of Securities and Exchange Commission (SEC) mandated segment data. In 1970, the SEC required multisegment firms to report segment revenue and income in their 10-K reports. Previous studies have reported that SEC mandated segment data reduced the systematic risk and improved earnings prediction but had no impact on security prices. However, the security price studies suffered from methodological deficiencies. This study overcomes these deficiencies and reexamines the security price impact of SEC man- dated segment data. It also extends the earnings prediction studies by examining the impact of segment data on divergence of beliefs of multiple financial analysts' earnings forecasts, an aspect of earnings prediction not studied by previous research. Disclosure of segment data is conceptualized as providing a more precise information signal about firm value to investors. Using theories developed in the information economics literature (Hoithausen and Verrecchia 1990, and others), two hypotheses are derived. The first hypothesis predicts that price variability around the dates of release of 1970 10-K reports will be higher than price variability around the dates of release of 1969 10-K reports. The second hypothesis predicts that divergence of beliefs in May 1971 (after the release of SEC mandated segment data) will be lower than divergence of beliefs in May 1970 (before the release of such data). Based on theory and evidence in Bhushan (1989), two more hypotheses are derived. The magnitudes of increase in price variability and decrease in divergence of beliefs are hypothesized to be positively correlated with the number of segments. The Patell (1976) methodology is used to measure price variability, and multiple financial analysts' earnings forecasts reported in the Standard & Poor's Earnings Forecaster are used to measure divergence of beliefs. The sample is divided into a control group and an experimental group based on segment data disclosures prior to the SEC mandate. The empirical evidence shows that, for the experimental group, there is a significant increase in price variability and a significant decrease. in divergence of beliefs. There are no such effects for the control group. The evidence also shows that, for the experimental group, the magnitudes of increase in price variability and decrease in divergence of beliefs are directly proportional to the number of segments. There are no such relationships for the control group.