The impact of SFAS 131 on financial analysts' information environment

The Financial Accounting Standards Board issued SFAS 131, Disclosures about Segments of an Enterprise and Related Information, to replace the previous standard governing segment information, SFAS 14. Financial Analysts lobbied for changes in segment disclosure requirements and had specifically demanded the "management approach" adopted in SFAS 131. I examine the effect of SFAS 131 on the information environment of financial analysts by assessing its effect on the average individual forecast accuracy of financial analysts as well as its effect on the precision of information common to all analysts and the information idiosyncratically acquired by individual analysts. Further, this approach also enables me to examine the relationship between the change in precision of common information and idiosyncratic information, which has been the subject of theoretical research. My design uses each firm as a control for itself to control for firm-specific unobservable factors in addition to using a sample of control firms to control for economy-wide factors. The results show that ceteris paribus, the change in average individual forecast accuracy is higher for firms that have to change their reported segments to comply with SFAS 131 relative to firms that do not have to do so. Further the change in precision of idiosyncratic information is strongly related to the change in precision of common information. This is consistent with a complementary relationship between common and idiosyncratic information. After controlling for this relationship, the change in precision of idiosyncratic information is only weakly related to whether or not a firm has to change its reported segments to comply with SFAS 131.