Predicting future corporate earnings with industry and geographic segment disclosures

This study compares the predictive ability of both operating (industry) segment and supplemental (geographic) segment disclosures based on earnings forecast models that (1) use only IND and GEO disclosure information or (2) use alternative industry and geographic information in combination with the IND or GEO segment disclosures. The results provide some evidence to suggest that IND disclosures can be more predictive than GEO disclosures. However, this result is dependent upon accurate predictions (perfect forecasts) of alternative industry sales growth information being incorporated into the forecast. Consistent with the FASB's decision to no longer require firms to report segment earnings information in their supplemental segment disclosures under SFAS 131, I find no evidence to suggest that segment earnings information is incrementally more predictive than earnings forecasts generated using segment sales information. Finally, this study adds to the segment reporting literature relating firm characteristics to the usefulness of segment information. I test whether firm characteristics can explain when one segment disclosure type has more predictive ability relative to the other segment disclosure type reported by the same MNC. I find evidence indicating that the usefulness of segment information in predicting future earnings is positively related to the variance in sales growth across the reported segments.