An Examination of the Usefulness of Segment Information for Assessing the Operating Risk of the Firm
Powers, Marian
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https://hdl.handle.net/2142/71364
Description
Title
An Examination of the Usefulness of Segment Information for Assessing the Operating Risk of the Firm
Author(s)
Powers, Marian
Issue Date
1982
Department of Study
Accountancy
Discipline
Accountancy
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Accounting
Abstract
The primary objective of this research is to evaluate the usefulness of segment information, as required by Statement of Financial Accounting Standards (SFAS) No.14, in assessing the operating risk of the firm. Specifically this research empirically evaluates whether a segment operating risk measure (ORM), utilizing current segment accounting disclosures, is a better measure of operating risk than a consolidated ORM and as good as a market based ORM. These operating risk measures were developed from the capital asset pricing model by Hamada (1969) and Rubinstein (1973).
The sample of firms is comprised of firms which disclosed segment revenues and assets for years 1973 through 1978. Since five years of data were used to compute a single segment ORM, the research methodology was limited to ANOVA and correlation tests. To facilitate comparisons among the three ORMs a criterion measure of operating risk is included in the analysis.
Incorporating this criterion measure into the design, the research objective restated is to empirically evaluate whether there are significant differences between the three ORMs with respect to the criterion measure, both in terms of pattern of behavior as well as estimation differences.
The ANOVA and correlation test results indicate that for 1977 and 1978 there are significant differences between the three ORMs with respect to the criterion measure. In particular the segment ORM and the consolidated ORM are significantly different. Based on Blackwell's (1954) theorem regarding the fineness of information sets, segment information should be at least as good as consolidated information and any differences which result should imply that segment information is better. However the results do not support this implication because the segment ORM provided a worse estimate of the criterion measure of operating risk.
One possible explanation is that measurement error could have created sufficient noise such that segment information is a poor estimator of the criterion measure of operating risk. This is probable since not all segment disclosures needed to estimate operating risk are available under SFAS No.14. Other possible explanations are that segment information is not useful for assessing operating risk or that the criterion measure selected is not a good representation of the true operating risk of the firm.
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