The effects of segmental reporting on investment analysis

Abstract

It was in the mid 1960s that financial statement users became increasingly aware that aggregated data of diversified companies did not satisfy·their informational needs. This awareness was indicative of the heightened interest in segmental reporting and with effect from 1 January 1987, Recommended Accounting Practice 2 "Reporting Financial Information by Segment" was adopted as an accounting standard in Singapore. This study was conducted primarily to determine the effects on investment analysis of the presence of segmented information in financial statements of diversified firms. With this objective in mind, a questionnaire survey was carried out whereby the subjects were asked to assign share prices to two diversified companies, ABC Ltd. and XYZ Ltd. which operated in two types of industries. However, ABC Ltd. had a greater extent of its operation in a stagnant industry and a lesser extent in a fast-growing industry. The reverse operating conditions applied to XYZ Ltd. One half of the subjects received statements that included segmental information (experimental group) and the remaining received statements that did not include such information (control group). All the respondents from the control group attached a higher firm value to ABC Ltd. compared to XYZ Ltd. On the other hand, only 9 out of 32 respondents from the experimental group considered the shares of ABC Ltd. more valuable than XYZ Ltd. Four statistical tests were performed on the data collected from the questionnaires. The results generated from the tests led us to conclude that investment analysis of financial statements with segmented data was significantly different from that without accompanying segmented data. Hence provision of segmented information is useful in investment analysis and diversified firms should include such information in their financial reports.