Determinants of segment reporting quality: evidence from EU

Purpose :This study aims to provide some empirical evidence on the determinants of segment reporting quality, and to propose a new measurement tool of segment reporting quality – segment reporting quality index (SRQI). Design/methodology/approach : On the basis of hand-collected segment data for a sample of 171 European Union publicly listed companies from the 2006-2012 annual reports, the study uses multiple regression model to investigate the determinants of segment reporting quality. A new measurement of segment reporting quality is constructed. It aggregates different segment reporting practices indicators, including the number of segments, the extent of information disclosed and the geographic fineness. Additional estimations are conducted to test the robustness of the results. Findings : The results suggest that there is a substantial variation in the quality of segment reporting among the sampled European Union firms. Large corporations, audited by Big 4 auditors and more internationally oriented, tend to provide a higher quality of segment reporting. In contrast, debt leverage negatively impacts the quality of segment reporting. However, the quality is not significantly related to profitability. The findings are fairly robust to a number of econometric models that control, for year fixed effects and pre- and post-International Financial Reporting Standards 8 adoption. Overall, the findings are generally consistent with the predictions of agency theory. Research limitations/implications : The results imply that considerable managerial discretion exists. Despite the IFRS commitment to enhance comparability of the financial statements, segment information remains very disparate. It enables investors to get a better understanding of a firm's activities, but it does not allow for a better assessment of a firm as compared to the other firms of the same sector. As compared with other IFRS standards, the segment reporting has more relation with corporate governance structure and specific institutions that regulate a sector or a country. Furthermore, the results show that firm characteristics are associated with the study's aggregated measure of segment reporting quality (SRQI) consistently with theoretical and empirical evidence. SRQI can, thus, be used by researchers for replication or to study new questions on firms' segment disclosure behavior on a much wider set of firms in the economy. While this research makes several noteworthy contributions, the authors acknowledge that SRQI considers only multisegments firms that disaggregate their primary/operating segments by line-of-business and disclose secondary/entity-wide level geographic information. Originality/value : This study offers new evidence on the determinants of segment reporting quality following IFRS adoption, in the European Union context. This study contributes to the existing literature by proposing an aggregated measure of segment reporting quality (SRQI). Unlike previous measures, which were usually limited to researcher self-constructed indexes, SRQI captures different facets of segment information in terms of disaggregation and disclosure extent.