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

In this paper, we deliver US-sample based evidence that suggests 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. In particular, the forecast error is associated with the profitability gap–and even its direction–when reported segments lack major profitability components such as assets, revenue, or operating income. Furthermore, we find that the EPS forecast error increases with an increased segment split when controlling for diversification, which suggests that disaggregation per se does not improve the ability of security analysts to forecast earnings. Our panel consists of a sample of 591 US listed companies and covers the period 2009 to 2016.