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Segment earnings and managerial incentives: evidence from foreign firms cross-listed in the USA

Fangjun Sang (Department of Accounting, Saint Bonaventure University, Saint Bonaventure, New York, USA)
Pervaiz Alam (Department of Accounting, Kent State University, Kent, Ohio, USA)
Timothy Hinkel (Dauch College of Business, Ashland University, Ashland, Ohio, USA)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 25 April 2022

Issue publication date: 1 June 2022

194

Abstract

Purpose

Prior studies find that US firms with managerial incentives may manipulate the earnings gap to obscure higher performing segments to competitors or to hide underperforming segments from external monitors. The purpose of this study is to complement extant research by examining the association between managerial incentives and segment earnings reporting of cross-listed firms in the USA and the impact of country-level characteristics on this association.

Design/methodology/approach

The dependent variable is the earnings gap between firm-level earnings and sum of segment-level earnings. Managerial incentives are proxied by proprietary cost and agency cost. Proprietary cost is measured by the Herfindahl index. Agency cost is measured by inefficient resource transfer activities across segments. Foreign firms in this study are companies listed on major US Stock Exchanges with headquarters outside the USA. Comparable US firms are selected using the Propensity Score Matching procedure as a control group.

Findings

The authors find that 1) proprietary cost motive is not the determinant of earnings gap reporting for cross-listed firms; 2) cross-listed firms motivated by agency costs are more likely to manipulate segment earnings reporting than US firms; and 3) among cross-listed firms motivated by agency costs, firms in weak rule of law countries demonstrate more manipulation in segment earnings than firms in strong rule of law countries.

Originality/value

Extant research with regard to segment reporting exclusively focuses on US firms, and little is known about the practice of segment reporting by cross-listed firms originating from different legal regimes. This study fills the gap in the literature by comparing cross-listed firms to US firms in the reporting of segment earnings. The results of this study have implications for regulators and investors who are interested in evaluating the extent of cross-listed firms’ financial reporting quality.

Keywords

Acknowledgements

The authors appreciate valuable comments and suggestions from Li-chin (Jennifer) Ho (editor), two anonymous reviewers, participants at Kent State University workshop, discussant and participants at the 2017 American Accounting Association annual meeting. All errors are their own.

Citation

Sang, F., Alam, P. and Hinkel, T. (2022), "Segment earnings and managerial incentives: evidence from foreign firms cross-listed in the USA", Review of Accounting and Finance, Vol. 21 No. 3, pp. 130-153. https://doi.org/10.1108/RAF-10-2020-0305

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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