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On the credibility of intersegment revenues and the persistence of segment earnings

Author

Listed:
  • Yingxu Kuang
  • Xiaoyan Chu
  • Yu Zhang

Abstract

SFAS 131 that governs segment reporting requires disclosing profits/losses of reportable segments in multi-segment firms. By definition, segment profit/loss consists of income from both external transactions and intersegment transactions. Owing to the discretionary nature of the intersegment transactions, we suspect that management uses intersegment revenues to manipulate segment earnings. Examining the credibility of intersegment revenues relative to that of external revenues, we find the following: i) intersegment revenues have lower persistence than external revenues; ii) discretionary intersegment revenues have lower persistence than non-discretionary intersegment revenues and iii) the magnitude of discretionary intersegment revenues is consistent with the goal of maximising firm value.

Suggested Citation

  • Yingxu Kuang & Xiaoyan Chu & Yu Zhang, 2016. "On the credibility of intersegment revenues and the persistence of segment earnings," International Journal of Accounting, Auditing and Performance Evaluation, Inderscience Enterprises Ltd, vol. 12(4), pages 333-359.
    • Handle: RePEc:ids:ijaape:v:12:y:2016:i:4:p:333-359
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