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Discretionary Disclosure in Financial Reporting: An Examination Comparing Internal Firm Data to Externally Reported Segment Data

September 2009

Working Paper Number:

CES-09-28

Abstract

We use confidential, U.S. Census Bureau, plant-level data to investigate aggregation in external reporting. We compare firms' plant-level data to their published segment reports, conducting our tests by grouping a firm's plants that share the same four-digit SIC code into a 'pseudo-segment.' We then determine whether that pseudo-segment is disclosed as an external segment, or whether it is subsumed into a different business unit for external reporting purposes. We find pseudo-segments are more likely to be aggregated within a line-of-business segment when the agency and proprietary costs of separately reporting the pseudo-segment are higher and when firm and pseudo-segment characteristics allow for more discretion in the application of segment reporting rules. For firms reporting multiple external segments, aggregation of pseudo-segments is driven by both agency and proprietary costs. However, for firms reporting a single external segment, we find no evidence of an agency cost motive for aggregation.

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:
aggregation, report, sale, company, disclosure, aggregate, agency, earnings, corporation, accounting, sector, classified, consolidated, reporting, revenue, firms export, firms exporting, security, expense, assessed

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Census of Manufactures, Annual Survey of Manufactures, Internal Revenue Service, Standard Industrial Classification, Social Security Administration, Longitudinal Research Database, National Science Foundation, Center for Economic Studies, Securities and Exchange Commission, New England County Metropolitan, Census Bureau Center for Economic Studies, Chicago Census Research Data Center, North American Industry Classification System, Special Sworn Status, Census Bureau Disclosure Review Board

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