The Shortcomings of Segment Reporting and their Impact on Analysts' Earnings Forecasts

In this paper, we deliver US-sample based evidence suggesting that
segment reporting under the "management approach" of ASC 280
(SFAS 131) biases analysts' earnings per share (EPS) forecasts. We
show that the error in EPS forecasts corresponds to a profitability
"gap" between profitability aggregated from segment reporting and
profitability computed from consolidated financial statements. We
show that the forecast error is associated with the profitability gap
when reported segments lack major profitability components such as
assets, revenue, or operating income. Furthermore, we end that the
EPS forecast error increases with an increased segment split when
controlling for diversification, suggesting that disaggregation per se
does not improve the ability of equity analysts to forecast earnings.
Our panel consists of a sample of 591 US listed companies and covers
the period 2009 to 2016.