Publication Type

Journal Article

Version

submittedVersion

Publication Date

3-2024

Abstract

We study the role of segment disaggregation in equity-based pay contracts in diversified firms. Disaggregated segment disclosures can improve the observability of managerial actions in internal capital markets and thus increase implicit incentives for managers to allocate resources as desired by shareholders, substituting for explicit incentives provided to CEOs. We use the adoption of Statement of Financial Accounting Standards No. 131 as an identification strategy and find that firms affected by this segment reporting mandate significantly decreased the provision of equity-based incentives in the post-adoption period, especially for firms with higher operating volatilities. This effect is also more pronounced for firms with weaker board monitoring in the pre-adoption period but with stronger external monitoring in the post-adoption period. Overall, our results suggest that disaggregated segment disclosures reduce the use of equity-based pay contracts in diversified firms by enhancing the monitoring of managers.

Keywords

Agency costs, diversified firms, equity-based pay, flow delta, segment disclosure, SFAS No. 131

Discipline

Accounting | Corporate Finance

Research Areas

Corporate Reporting and Disclosure

Publication

Contemporary Accounting Research

ISSN

0823-9150

Identifier

10.1111/1911-3846.12928

Publisher

Wiley

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1111/1911-3846.12928

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