Accounting research at Chicago GSB has a long and
proud tradition. PhD graduates in accounting are
strongly represented on the faculties of the world’s
top business schools, and some of the most-cited research in
accounting has been produced by Chicago faculty and alumni.
As you might expect, given the interdisciplinary nature of the
GSB and its strengths in finance and economics, accounting
research at the GSB has a strong economic flavor.
This issue of Capital Ideas describes four research projects
by accounting faculty at Chicago GSB. Although each project
is quite different, they all show how accounting has real economic
effects on decisions made by managers, shareholders,
boards, regulators, and securities analysts.
In the first study, Philip Berger assesses the costs and benefits
of segment reporting�the information managers provide
in corporate financial statements about the operations and
results of their companies’ various business segments. This
has always been a controversial area in accounting. On one
hand, securities analysts and other investors would like to see
highly disaggregated financial statement data, since that data
helps them better evaluate management and predict future
performance. Management, on the other hand, strongly
resists increasing segment disclosure, arguing that to disclose
detailed segment data provides competitors with valuable
proprietary information.
Berger’s study investigates the introduction of Statement
of Financial Accounting Standards 131 (SFAS 131) in the late
1990s. While the previous rule (SFAS 14) also required segment
reporting, its definition of segments was vague and gave
management latitude to define segments broadly, and so
largely avoid segment disclosure. Berger argues that managers
took advantage of this latitude to hide the results of units
that were performing poorly, which he labels the “agency
costs” view.
When SFAS 131 was introduced, companies were forced to
provide more detailed segment reporting; it turns out that
many of those newly disclosed segments were poor performers.
Overall, Berger concludes that SFAS 131 was a beneficial
change in financial reporting.
The study by Jonathan Rogers and Andrew Van Buskirk
looks at a different type of corporate disclosure, namely the
disclosure of information by management through conference
calls and news releases, which often includes the issuance of
earnings forecasts. Theory suggests that by providing more
information to investors, managers can increase analysts’ and
investors’ interest in their companies, improve stock market
liquidity, and ultimately lower the cost of capital.
These disclosures can, however, result in costly stockholder
litigation. For example, if management issues an earnings
forecast that proves to be too optimistic, subsequently causing
the stock price to fall, investors can file suit against the company
and its management, claiming that managers deliberately
issued optimistic guidance to pump up the stock price.
There is a long-standing debate about whether these types
of class action stockholder lawsuits are beneficial. Managers
argue that these are largely “nuisance” suits that have little
merit, while advocates of these suits argue that this litigation
is a necessary disciplining mechanism that helps prevent
Douglas J. Skinner
John P. and Lillian A. Gould Professor of Accounting at the University of Chicago Graduate School of Business