Our approach is subject to ca veats as a result of the following two maintained assumptions:
(1) managers have relatively less discretion about the extent of segment aggregation
under the new standard, and (2) the increased disclosure under the new standard
reflects discretionary aggregation under the old standard. To the extent that these assumptions
are not true, our segment classification—and, hence, our inferences—will be affected.
With respect to the first assumption, we emphasize that our maintained assumption is that
there is less discretion under SFAS No. 131 in one dimension of segment reporting—the
number of reported segments. We recognize that the new standard still allows substantial
discretion about some other aspects of segment reporting, such as the extent of allocation
across segments. It is therefore possible that our results might be affected if managers
strategically allocate expenses within each firm. For instance, if the AC (PC) motive to
withhold segment information dominates, managers might have an incentive to allocate less
(more) expenses to the segments with relatively low (high) abnormal profits. However, such
strategic allocation would work against finding the hypothesized results.