Kaj Ter Et Al 2017 Abacus

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ABACUS, Vol. 53, No. 1, 2017 doi: 10.1111/abac.12105
PETER KAJÜTER AND MARTIN NIENHAUS
The Impact of IFRS 8 Adoption on the

Usefulness of Segment Reports
We analyze the impact of IFRS 8 on the usefulness of segment reports

from an investor’s perspective. The analysis comprises three steps. First,
we compare the value relevance of segment reports before and after the
introduction of IFRS 8. Second, we analyze a treatment group of firms that
had to change their segmentation upon IFRS 8 adoption and a control
group that was unaffected by its introduction. Third, the requirement to
report financial information for the current and previous year under
current accounting rules allows us to analyze a unique data set of segment
reports for the same company and the same year under two different
standards. Our results based on German listed firms show superior value
relevance of segment reports according to IFRS 8 compared to IAS 14 in
all three steps. Additional analyses suggest that the adoption of IFRS 8 is
also related to a decline in information asymmetry. Our findings are robust
to a number of alternative specifications.
Key words: IAS 14; IFRS 8; Management approach; Segment reporting;
Quasi-experimental; Value relevance; Information asymmetry.
INTRODUCTION
Despite the widely acknowledged relevance of segment reporting (e.g., Brown,

1997), there are different views about the approach that is best suited to provide
useful segment information. During the 1990s, the International Accounting
Standards Committee (IASC) and the Financial Accounting Standards Board
(FASB) discussed various concepts for segment reporting (e.g., the risk-and-reward
approach versus the management approach) but could not agree on a common
standard. In 1997, the IASC issued IAS 14 following the risk-and-reward approach,
whereas the FASB published SFAS 131 following the management approach.
In 2006, however, as a result of the short-term convergence project with
US-GAAP, the International Accounting Standards Board (IASB) replaced IAS
14 with IFRS 8 and thereby adopted SFAS 131 with only minor differences. This
step has been met with both support and criticism.1 Two members of the IASB, for
PETER KAJÜTER and MARTIN NIENHAUS (martin.nienhaus@wiwi.uni-muenster.de) are with University of

Münster. The authors gratefully acknowledge helpful comments from Jacqueline Birt, Florian Eugster, Peter F.
Pope, Ian M. Tarrant, and Senyo Tse as well as conference participants at the European Accounting Association
35th Annual Congress 2012 in Ljubljana, 24th Asian-Pacific Conference on International Accounting Issues
2012 in Maui, and the AS-VHB and IAAER Joint Annual Conference 2013 in Eschborn.
1
See Crawford et al. (2014) for a detailed discussion of the political controversy surrounding the intro-
duction of IFRS 8.
28
© 2017 Accounting Foundation, The University of Sydney
USEFULNESS OF SEGMENT REPORTS UNDER IFRS 8
instance, expressed dissenting opinions and voted against the new standard. While
they supported the management approach for defining reportable segments, they be-
lieved that the standard should require the disclosure of segment data in line with
IFRS as non-GAAP measures might mislead users. Moreover, the European Parlia-
ment expressed concerns about IFRS 8, which delayed the endorsement for almost
one year. The European legislator criticized the discretion and potential lack of com-
parability associated with IFRS 8 and expressed concern about adopting a US account-
ing standard without assessing the impact for EU law (European Parliament, 2007a).
After the European Commission had analyzed the potential consequences of IFRS
8, the European Parliament finally endorsed IFRS 8 (European Parliament, 2007b).
Given the relevance of segment information, the major changes to segment
reporting introduced by IFRS 8 and the controversial views about the management
approach inherent in the new standard, the IASB initiated a post-implementation
review of IFRS 8 in 2012. An IASB staff paper from January 2013 concluded: ‘At
this time, there is no academic evidence that application of IFRS 8 has reduced
information asymmetry … Studies have generally not considered the impact of
IFRS 8 on … the usefulness for investors of segment disclosure based on the
management approach’ (IASB, 2013, p. 7).
Therefore, we examine the usefulness of segment reporting under the management
approach by analyzing its value relevance in the pre- and post-IFRS 8 periods. Al-
though the value relevance of financial information is not an objective of the IASB’s
Conceptual Framework, the value relevance approach is used to operationalize the
fundamental characteristics of relevance and faithful representation/reliability.2 An
accounting number will turn out to be value relevant if the information is relevant
to an investor’s equity investment decision and reliable enough to be considered
(Barth et al., 2001, p. 80). Hence, we use the value relevance framework to analyze
whether the introduction of IFRS 8 improved the usefulness of segment data from
investors’ perspectives. To corroborate the value relevance analyses, we provide
additional tests of information asymmetry effects measured by bid-ask spreads.
This paper draws on a unique hand-collected sample of segment data reported by
German listed firms under IAS 14 (pre-period) and IFRS 8 (post-period) from 2007
to 2010. The German setting is particularly interesting because IFRS 8 requires the man-
agement approach for segment reporting, and German firms have traditionally main-
tained separate records for financial reporting and managerial accounting purposes.
Hence, the effect of introducing the management approach to segment reporting should
be particularly pronounced for German firms because of the traditional differences
between financial and management accounting. Thus, in Germany, there should be
more divergence in the segment reports pre- and post-IFRS 8 compared to firms in
countries that generally have largely integrated accounting systems.
We address our research question in three ways. First, we simply compare the
value relevance of segment reports pre- and post-IFRS 8. While we find a minimal
2
Note that the IASB issued changes to the Conceptual Framework as part of the IASB Agenda Project
in September 2010. The fundamental qualitative characteristic reliability was replaced by the term
‘faithful representation’ due to the vagueness of the meaning of the former. We will use both terms
interchangeably.
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decline in the value relevance of consolidated financial statements from the IAS 14
period (2007–2008) to the IFRS 8 period (2009–2010), we find an increase in the
value relevance of segment reporting. Second, we exploit a unique setting whereby
a substantial number of our sample firms already reported segmental information in
conformity with the management approach under IAS 14 and thus did not have to
change the way they presented their segments upon adoption of IFRS 8. This allows
for a difference-in-differences design that inherently controls for confounding time
effects. While our treatment group of firms that changed their segment reporting
upon IFRS 8 adoption shows a substantial increase in value relevance, our control
group does not experience a considerable change, which is in line with the general
trend in the value relevance of consolidated financial statements from the 2007–
2008 to the 2009–2010 period. Third, we take advantage of the fact that firms report
the current and previous year in their financial statements based on the current
accounting standards. Hence, in the first year of IFRS 8 adoption, firms had to
report information for the previous year (lagged-adoption) under IFRS 8 as well.
This allows us to use a unique data set of segment reports for the same company
and the same year under two different standards. Again, we find that segment
information under IFRS 8 yields more value-relevant information. Overall, our
three approaches signal that the introduction of IFRS 8 and its use of the manage-
ment approach improved the value relevance of segment reporting. Finally, we also
analyze information asymmetry effects in terms of bid-ask spreads and find that
firms experience a decrease in information asymmetry upon adoption of IFRS 8,
which is consistent with the findings of the value-relevance analyses. Our results
are robust to a number of sensitivity tests and alternative specifications.
This paper contributes to the literature by providing evidence of a superior
usefulness of segment reports prepared in accordance with IFRS 8 compared to
IAS 14—a result that supports the findings of the IASB’s post-implementation
review and confirms that the new standard improved the value relevance of financial
reporting. This finding may also be of interest for national standard setters contem-
plating a change in segment reporting rules. Furthermore, we expand the literature
by explicitly comparing the suitability of different fundamental approaches to
segment reporting (i.e., the management approach versus the risk-and-reward
approach) rather than focusing on the usefulness of segment reporting compared
to consolidated financial statements as prior work has done (e.g., Boatsman et al.,
1993; Bodnar and Weintrop, 1997; Tse, 1998; Givoly et al., 1999). Moreover, some
prior studies have analyzed the impact of introducing the management approach
to segment reporting (SFAS 131) in a US setting (e.g., Hope et al., 2008; Hossain,
2008). The introduction of SFAS 131, however, meant an increase in segment
information compared to the preceding standard (SFAS 14).3 Thus, it is impossible
to disentangle the impact of the change in underlying approaches from a mere in-
crease in the quantity of segment information supplied. In our sample, the level of
3
SFAS 14 was heavily criticized due to its loose requirements. In 1993, the Association for Investment
Management and Research (AIMR) requested segment information to be more disaggregated and
asked for more information for each segment than was reported under SFAS 14 (Herrmann and
Thomas, 2000). This was addressed with the introduction of SFAS 131 (FASB, 1997, paras 41–45).
30
segment information under IAS 14 and IFRS 8 remained quite similar. IFRS 8
requires a comparable amount of segmental narratives and even fewer line items.
Hence, the adoption of IFRS 8 did not mean an increase in segmental disclosures,
but rather a change in the underlying rationale so that segments are identified the
same way as they are used internally. This allows us to isolate the effect to the
change in fundamental principles. Finally, we are the first to find segment
information under IFRS value relevant at all.
INSTITUTIONAL SETTING
Segment reporting requirements were substantially changed with the adoption of

IFRS 8 in November 2006. According to the new standard, companies with publicly
traded debt or equity instruments must apply IFRS 8 for fiscal years beginning on or
after 1 January 2009. IFRS 8, which replaced IAS 14, is virtually identical to the
US-GAAP segment reporting requirements of SFAS 131 issued in 1997. By
ostensibly adopting US-GAAP, there was a fundamental change in the principles
of segment reporting from the risk-and-reward approach (i.e., IAS 14) to the man-
agement approach (i.e., IFRS 8 and SFAS 131). The latter allows users of financial
statements to see the entity ‘through the eyes of management’ (Martin, 1997).
Under IFRS 8, segment reporting requirements differ in three main respects:
identification of segments, measurement basis used, and reported line items. Re-
garding the identification of segments, IAS 14 allowed preparers to identify seg-
ments according to the risks and returns of either the products or services provided
(i.e., business segments) or the regions in which the firm operates (i.e., geographical
segments). IFRS 8, by contrast, requires firms to identify segments according to the
firm’s internal organizational structure and the way in which the firm’s chief
operating decision maker (CODM) allocates resources and evaluates performance.
Moreover, IAS 14 required segment information to be consistent with the general
measurement principles of IFRS, whereas IFRS 8 requires segment items to be
measured on the same basis that is used internally by the CODM. This implies that
segment items may be non-GAAP pro forma measures. Finally, IFRS 8 only
mandates the disclosure of those items in the segment report that are provided
internally to the CODM, whereas IAS 14 required the firm to disclose specific line
items for each reported segment, which increased the comparability of segment
reports across firms.
While the IASB was aware of the scope for discretion and decreased comparabil-
ity across firms associated with the management approach, it felt that the benefits
(e.g., more decision-useful information and convergence with US-GAAP) would
outweigh the costs. In assessing the possible benefits of IFRS 8 when the new
standard was proposed, the IASB had to rely on empirical evidence from the
implementation of SFAS 131 in the US. Although prior research indicated improve-
ments in segment reporting under SFAS 131 compared to the previous standard
SFAS 14 (e.g., Street et al., 2000; Botosan and Stanford, 2005), these findings cannot
be generalized and may not hold in the case of IAS 14. It is rather necessary to
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analyze the effect of IFRS 8 compared to IAS 14 as the latter differs from SFAS 14
in many ways. In particular, SFAS 14 required far less extensive disclosures than
IAS 14. Hence, it is difficult to distinguish whether the findings of US studies are
attributable to the introduction of the management approach or merely to increased
disclosures (or possibly both).
Moreover, the empirical evidence is limited to US firms, which have a different
tradition of organizing their accounting systems and a different structure of capital
markets compared to Continental European and in particular German firms. With
regard to the accounting system, US firms have one set of financial records for both
financial and managerial accounting purposes (i.e., integrated accounting systems),
whereas German companies traditionally maintain separate records for financial
and managerial purposes (i.e., dual accounting systems) (Kaplan and Atkinson,
1998). The data for managerial accounting often include imputed costs (e.g.,
imputed depreciation based on replacement cost, imputed interest in terms of the
cost of capital, etc.) and exclude neutral expenses (e.g., extraordinary expenses that
are not related to a firm’s business model) (Schildbach, 1997). The managerial
accounting system thereby leads to earnings that differ from those in the financial
statements. Although several multinational German firms have integrated their
accounting systems in recent years and now use IFRS data for management control
(Jones and Luther, 2005), the different tradition may still have an impact on
segment reporting under IFRS 8 as non-IFRS profit figures may be reported more
often than in other countries. Hence, the specifics of the German accounting
tradition, and in addition differences in the capital market structure, make it
impossible to generalize findings for US firms to German companies and make
the latter an interesting field for research into segment reporting.
THEORY AND PRIOR RESEARCH
Theoretical Foundation
Segment information in general is an important source of information for financial
analysts when valuing a firm (Brown, 1997). Segment reports help to disentangle
future cash flow streams that are subject to different economic environments and
thus help investors to value the firm (e.g., Tse, 1998; Givoly et al., 1999). However,
it is unclear how the change in the underlying principles from the risk-and-reward
approach to the management approach will impact the valuations of investors and
thus the usefulness of segment data. The IASB noted that the primary benefits of
introducing the management approach would be consistency of segment reports
with internal management information, segment disclosures that are more in line
with other parts of the annual report, an increased number of reported segments,
and more segment information in interim financial reports (IFRS 8.BC9). The
Board also noted that if IFRS amounts could be prepared reliably and timely under
the management approach, this approach would provide the most useful informa-
tion (IFRS 8.BC13).
32
Following the IFRS Conceptual Framework, financial information is decision

useful if it is relevant and faithfully represents what it purports to represent.
Moreover, comparability of financial information is one of the enhancing
characteristics of decision usefulness. Since value-relevance tests are used to
operationalize these criteria (Barth et al., 2001), we discuss the impact of IFRS 8’s
adoption in the following.
With regard to relevance, the management approach allows users of financial
statements to see the entity ‘through the eyes of management’. Segment reports
provide investors with the same information that management uses internally for
decision making and performance evaluation. The results of the Jenkins Report
suggest that this information is also relevant for external users of financial state-
ments and enhances their ability to monitor management because they receive a
more consistent and reliable picture of the company (AICPA, 1994; Martin, 1997).
Maines et al. (1997) confirm this finding using experimental evidence. They observe
that financial analysts are more confident in their forecasts and consider reports
more reliable when segment definitions in the financial statements are identical to
those employed internally. Moreover, such segment reports improve the ability of
users of financial statements to evaluate future cash flow prospects (Ernst and
Young, 1998). Thus, we believe that the possibility of seeing the entity ‘through
the eyes of management’ under IFRS 8 will reduce information asymmetry between
management and investors and enhance the relevance of segment reports.
However, financial information must also be faithfully represented. One of the
main concerns about the introduction of IFRS 8 was that the management approach
offers more room for discretion. For instance, a firm could decide to introduce
another reporting level at a more aggregated stage and deem this level as the
CODM level to avoid the disclosure of information about specific segments. Based
on interviews with a broad range of stakeholders, Crawford et al. (2012) highlight
how a number of those interviewed feared that some companies might change what
is reported to the CODM to avoid disclosure of commercially sensitive segmental
information. Hence, there is room for a firm to influence the level and content of
segment disclosures. The extent to which firms make use of this discretion will
depend on the perceived costs of segment disclosures.
A further concern voiced by the European Parliament was a potential lack of
comparability (European Parliament, 2007a). Comparability of financial informa-
tion, however, is one of the enhancing characteristics of decision usefulness as users’
decisions involve choosing between different investment opportunities. With the
introduction of the management approach, comparability across firms will decrease
because the financial items disclosed for each segment will depend on the firms’
internal reporting system. It can be assumed that comparability across firms is worse
the more differences there are between the managerial and financial accounting
system, that is, the less integrated the accounting system is. Moreover,
inter-temporal comparability may also be impaired as CEO turnovers or other
events often lead to changes of internal reporting systems. The notion of impaired
comparability is also supported by Pacter (1994), Herrmann and Thomas (1997),
and Emmanuel and Garrod (2002) who recognize that introducing the management
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approach to segment reporting implies an emphasis of relevance over

comparability.4
Hence, from a theoretical perspective, the relevance of segment reports for users
of financial statements should increase. The faithful representation of segment
information, however, may be impaired due to the managerial discretion permitted
under IFRS 8. Moreover, there will be less cross-company and inter-temporal
comparability of segment information. As relevance, faithful representation, and
comparability jointly determine the usefulness of financial information and their
conceptual analysis is somewhat ambiguous, it is a priori uncertain whether the
introduction of IFRS 8 has improved the usefulness of segment information in
valuing firms. Therefore, the impact of introducing the management approach to
segment reporting on the usefulness of segmental information is ultimately an
empirical question.
Prior Research
Several studies have investigated the usefulness of segment reporting (e.g., Kinney,
1971; Kochanek, 1974; Collins, 1976; Simonds and Collins, 1978; Dhaliwal, 1979;
Ajinkya, 1980; Aitken et al., 1994; Hu et al., 2010). Most of these studies indicate that
segment information is incrementally useful compared to consolidated financial
information. Still, the question of which underlying approach of segment reporting
is best suited for the provision of useful information is unexplored thus far. In the
specific context of IFRS 8’s adoption and the introduction of the management
approach, there is barely any empirical evidence on its economic consequences.
Two concurrent studies by Bugeja et al. (2015) and Leung and Verriest (2015) do
not find an impact on analysts’ forecasts or liquidity.
There is some evidence on the impact of IFRS 8 on segment reporting practice.
For instance, KPMG (2010), Crawford et al. (2012), Kang and Gray (2013), and
Nichols et al. (2012) find an increase in the number of reported segments and a
decrease in reported line items upon IFRS 8 adoption for a variety of different
countries and firms. However, these studies are solely descriptive. The question
whether the introduction of IFRS 8 yields superior usefulness compared to IAS 14
has not been fully answered so far.
Evidence from US studies on SFAS 131 is restricted to geographical segment
information using only broad classifications of foreign and domestic geographical
segment information (e.g., Hossain and Marks, 2005; Hope et al., 2008; Hossain,
2008). In contrast, we employ very fine segment valuation models which are capable
of using line of business as well as geographical segment data and thus do not restrict
analysis to geographical numbers. This is particularly important as more than 80%
of our sample firms use line of business as the predominant segmentation criterion.
Moreover, findings of SFAS 131 studies cannot be generalized to segment reporting
4
Emmanuel and Garrod (2002) imply that the introduction of the management approach may reduce
comparability and relevance in some cases.
34
under IFRS as the basis for comparison (SFAS 14 vs. IAS 14) is different. Further-
more, most US studies on SFAS 131 only find an impact for firms that previously
did not disclose any segment information and started segment reporting under
the new standard (e.g., Berger and Hann, 2003; Botosan and Stanford, 2005;
Ettredge et al., 2005). Thus, they analyze the economic consequences of a change
from no segment information to segment reports under the management approach.
We, however, analyze firms that already report segment information and
subsequently change the approach under which segment reports are prepared. This
allows us to explicitly compare the usefulness of different approaches to segment
reporting, namely the management versus the risk-and-reward approach.
Moreover, we reduce the research gap on the economic consequences of IFRS 8’s
adoption.
RESEARCH DESIGN AND SAMPLE
Empirical Models
For our value-relevance tests we use the Ohlson (1995) model. We employ a levels
model instead of a changes model specification because level models provide better
estimates of the earnings response coefficient as the corresponding coefficients from
changes models are often biased downwards (Kothari and Sloan, 1992). Moreover,
in a changes model specification, it is impossible to model cases when a firm changes
the number of reported segments from one year to another because one observation
reflects the change between two firm-years. We deflate by number of shares to
mitigate problems arising from size differences (e.g., Collins et al., 1997).5 The basic
Ohlson-model can be stated as:
Pricet;i ¼ α þ β1 Cons equityt;i þ β2 Cons earningst;i þ ϵt;i (1)
where:
Pricet;i = stock price 90 days after the end of financial year t for entity i;
Cons_equityt;i = book value of equity per share of year t for entity i;
Cons_earningst;i = income per share of year t for entity i.
Equation 1 shows stock price as a function of the book value of equity and
income. The stock price is obtained 90 days after fiscal year-end t. We assume that
a lag of three months is sufficient to allow the publication of the annual report
and for investors to obtain all the necessary details such that stock prices reflect
5
This model has been used in numerous value-relevance studies, for instance, Joos and Lang (1994),
Giner and Rees (1999), and Francis and Schipper (1999). Furthermore, Barth and Clinch (2009) show
that using number of shares as a deflation factor in the modified Ohlson (1995) model is better to re-
duce scale effects than using equity book value, price, or lagged-price as alternative deflation factors.
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all publicly available information.6 Furthermore, we use net income of continued

activities as a proxy for income.7
We construct segment models by breaking down earnings and equity information
to the segmental level. To ensure equivalent regression models with the same
number of independent variables, the following segment models include data
relating to the first three segments in order of appearance in the segment report.
Companies that report less than three segments are excluded. In robustness tests,
we estimate models using two or four segments which provide similar findings and
inferences. We also sort all segments by sales and find similar results. In case a firm
reports more than three segments, the data for the third segment are calculated as
the difference of the consolidated amount and the sum of segment one and segment
two.8 Alternatively, we follow Givoly et al. (1999) and accumulate the other
segments with the third segment, which yields similar findings.9 The first modifica-
tion of (1) uses the consolidated book value of equity and segment-based earnings:
Pricet;i ¼ α þ β1 Cons equityt;i þ γ1 Segment earnings1t;i þ γ2 Segment earnings2t;i (2)

þγ3 Segment earnings3t;i þ ϵt;i
where:
Segment earnings jt;i = income per share of segment j of year t for entity i.
Equation 2 can be further disaggregated. Given that most firms report assets as well
as liabilities on segment level, a measure of segment book value of equity can be es-
timated by the difference between the two former (Birt and Shailer, 2009, p. 10):
Pricet;i ¼ α þ δ1 Segment equity1t;i þ δ2 Segment equity2t;i þ δ3 Segment equity3t;i (3)

þγ1 Segment earnings1t;i þ γ2 Segment earnings2t;i
þγ3 Segment earnings3t;i þ ϵt;i
where:
Segment equity jt;i = book value of equity per share of segment j of year t for entity i.
Following Hayn (1995), we add loss dummy variables and their interactions with
earnings to control for a potential nonlinearity:
6
We also use different lag windows in our robustness tests section and find that our results do not de-
pend on the length of the estimation window.
7
Excluding profit from discontinued operations theoretically leads to a violation of the clean surplus
identity. However, Dechow et al. (1999) argue that these items are nonrecurring, and speaking from
a practical point of view, they maintain that the inclusion would probably not enhance the model.
8
All firms in our sample quantify income on segment level by EBIT-related profit measures. Therefore,
we use EBIT as the consolidated amount when determining the earnings of segment three:
Segment earnings3t;i equals Cons_EBITt;i – (Segment_earnings1t;i + Segment_earnings2t;i ).
PK
9
Segment_earnings3t;i equals Segment_earnings jt;i where K is the total number of reported segments.
j¼3
36
Pricet;i ¼ α þ β1 Cons equityt;i þ γ1 Segment earnings1t;i þ γ2 Segment earnings2t;i (2a)

þγ3 Segment earnings3t;i þ γ4 D1loss t;i Segment earnings1t;i
þγ5 D2loss t;i Segment earnings2t;i þ γ6 D3loss t;i Segment earnings3t;i
þγ7 D1loss t;i þ γ8 D2loss t;i þ γ9 D3loss t;i þ ϵt;i
Pricet;i ¼ α þ δ1 Segment equity1t;i þ δ2 Segment equity2t;i þ δ3 Segment equity3t;i

þγ1 Segment earnings1t;i þ γ2 Segment earnings2t;i þ γ3 Segment earnings3t;i
þγ4 D1loss t;i Segment earnings1t;i þ γ5 D2loss t;i Segment earnings2t;i
þγ6 D3loss t;i Segment earnings3t;i þ γ7 D1loss t;i þ γ8 D2loss t;i þ γ9 D3loss t;i þ ϵt;i
(3a)
where:
j
Dloss t;i = loss dummy: equals one if segment j of entity i reports a loss for year t,
and zero otherwise.
Following prior research, our primary metric for the value relevance of segment
reporting is the explanatory power (i.e., the adjusted R2) of these models (e.g., Harris
et al., 1994; Collins et al., 1997). We will also present the significance levels of regres-
sion coefficients; however, the adjusted R2 reflects the overall ability of accounting
data to capture the economic information impounded in stock prices. Moreover,
given that many companies operate in related industry sectors even if they show
different segments, the significance level of single coefficients may be impaired due
to multicollinearity between our segment variables. This multicollinearity, however,
does not affect the overall explanatory power of our models and therefore we prefer
adjusted R2 as our aggregate metric of value relevance.
Sample
The sample includes the German stock market index HDAX and SDAX as of 1
May 2011 for the period 2007–2010, each year potentially consisting of 160
observations that represent the majority of the German market capitalization.10
This period includes the last two years under IAS 14 (2007–2008) and the first
two years under IFRS 8 (2009–2010). Financial statement items and share price data
are obtained from Worldscope and DataStream. Segment information is hand col-
lected from the annual reports. The initial data set consists of 640 firm-year observa-
tions. Moreover, companies in the sample must meet all of the following criteria:
• availability of segment information in the annual financial statements;
• availability of a segment report under IAS 14 and IFRS 8;
10
The HDAX index is calculated by Deutsche Börse Group and comprises the main indices DAX (30),
MDAX (50), and TecDAX (30). The SDAX consists of 50 firms. All indices belong to the Prime
Standard market segment.
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TABLE 1
SAMPLE SELECTION PROCESS
Sample size
Firms Observations
Initial sample of HDAX + SDAX entities 2007–2010 160 640

Less entities with no segment report (7) (28)
Less no IAS 14 segment report (24) (96)
Less bank, insurance, or financial sector entities (20) (80)
Less entities with different currencies (3) (12)
Less early adopters (19) (76)
Less coinciding major structural changes (3) (12)
Less missing data for the whole period (6) (24)
Less firms with only two segments (8) (32)
Final sample for the period 2007–2010 70 280
• no firms from banking, insurance, or financial services industries;11

• currency of financial statements is Euro;
• no early adoption of IFRS 8; and
• no coinciding changes such as mergers, divestments, or major structural changes.
The elimination of 19 early adopters is very important because these firms have
certain incentives to adopt IFRS 8 early. These incentives may also impact some
of the factors that determine the value relevance of segment reports and thus they
may unduly influence our results. Moreover, we eliminate three firms that
underwent major structural changes that coincided with the adoption of IFRS 8.
This allows a cleaner test of the impact of IFRS 8’s adoption. Table 1 provides an
overview of the sample selection. We require a balanced panel for our analysis.
Our final sample consists of 70 firms and 280 firm-year observations.
Table 2 provides descriptive statistics. The mean number of segments is 3.45
under IAS 14 and 3.81 under IFRS 8. This increase in the number of segments upon
adoption of IFRS 8 is significant at the 5% level,12 which is in line with other studies
(e.g., Meyer and Weiss, 2010; Nichols et al., 2012). The mean number of reported
items per segment decreases from 19.59 to 18.24. This difference, however, is
insignificant (p-value = 0.207). In general, the number of segments and segment
items are more dispersed under IFRS 8. This could be due to an increased flexibility
of reporting based on the management approach. Moreover, in contrast to the
German accounting tradition, none of the firms in the final sample disclose
non-IFRS line items that are based on imputed costs or differ from IFRS measure-
ments in any other way.
11
This is consistent with a vast number of empirical accounting studies as these sectors differ signifi-
cantly from other industries in terms of business model and regulation.
12
We use normal t-tests as well as non-parametric ranksum tests. The results, however, are similar.
38
TABLE 2
DESCRIPTIVE STATISTICS
In million Euros Mean Std. Dev. Min. Median Max.

Variable
Price 31.80 34.43 0.53 21.31 250

- - - - -
Cons_equity 2,553.08 (25.71) 5,639.81 (43.61) 31.74 (0.55) 576.53 (14.96) 45,978 (335.25)
Cons_earnings 237.87 (2.63) 789.25 (5.63) 1,688 (15.60) 50.63 (1.50) 6,835 (45.16)
Segment_earnings1 283.38 (3.38) 724.72 (6.51) 881 (7.95) 67.25 (1.68) 5,909 (56.15)
Segment_earnings2 56.76 (0.95) 291.84 (2.12) 2,144 (11.50) 19.60 (0.56) 1323 (10.93)
Segment_earnings3 152.44 (0.91) 634.92 (3.42) 2,117 (10.12) 3.66 (0.12) 4,628 (22.06)
39
Segment_equity1 1,886.55 (21.10) 6,424.39 (61.50) 20.99 (1.77) 441 (8.44) 87,786 (834.17)
Segment_equity2 725.98 (7.66) 1,588.90 (11.59) 3,413 (4.18) 184.04 (4.15) 9,512 (90.39)
Segment_equity3 34.99 (3.17) 4,513.40 (40.19) 62,017 (589.30) 11.30 (0.45) 12,953 (66.78)
Number_segments 3.63 1.56 2.00 3.00 9.00
- IFRS 8 3.81 1.68 2.00 3.00 9.00
- IAS 14 3.45 1.40 2.00 3.00 8.00
Items_segment 18.92 8.96 2.00 17.00 59.00
- IFRS 8 18.24 9.01 2.00 17.00 59.00
- IAS 14 19.59 8.89 3.00 17.00 59.00
Price represents the stock price at day t=90 in Euros. All other variables are presented in million Euros and the deflated variables (by number of shares) are
presented in parentheses. The variable Cons_equity represents the consolidated book value of equity. Cons_earnings is the consolidated net income.
Segment_earnings1–Segment_earnings3 and Segment_equity1–Segment_equity3 are the respective segment values. Number of segments (Number_segments)
and items per segment (Items_segment) are calculated for a sample without application of the three segments criterion to avoid a bias and facilitate compa-
rability with segment disclosure studies.

ABACUS
Under IFRS 8, 80.7% use line of business, 10.7% geographical areas, and 8.6% a
mixture of both as the predominant segmentation criterion. Segmentation under
IAS 14 is very similar: 82.9% use line of business, 15.7% geographical areas, and
one firm even reported a mixed segmentation under IAS 14 although this was not
explicitly allowed.
For the difference-in-differences analysis, we divide the sample into two groups:
change firms that had to change their segment reporting upon adoption of IFRS 8
and no change firms that already reported segment information in line with the
management approach under IAS 14. These are firms that internally structured
their segments according to risk and rewards so that there was no need for them
to change segment reporting upon adoption of IFRS 8. Descriptive studies of the
impact of IFRS 8 on segment disclosures have shown that a substantial number of
firms belong to the no change group (e.g., Meyer and Weiss, 2010). This is similar
to our sample as only 40% of the German HDAX and SDAX firms changed
segmentation upon adoption of the management approach. Fifty-seven percent of
these firms increased the number of reported segments by one or two segments
and 14% even reported three or four additional segments compared to the previous
standard. Eleven percent reported fewer segments and 18% did not change the
number of segments but only changed the way of segmentation.13
Table 3 presents the Spearman correlation coefficients for the variables used in
the regression models.14 The coefficients of the IFRS 8 (IAS 14) period are above
(below) the diagonal. Consolidated as well as segment-level earnings and equity var-
iables show a positive and mostly significant association with stock prices. Correla-
tion coefficients between the individual segment variables suggest a certain degree
of collinearity between the independent variables of the segment models. As men-
tioned before, we are not that concerned about multicollinearity in our research
design since it does not impact the adjusted R2 of our regressions. However, we
address multicollinearity in our robustness tests and find that it is not harmful.
COMPARISON OF THE VALUE RELEVANCE OF SEGMENT REPORTING

UNDER IFRS 8 AND IAS 14
Pre-/Post-adoption Analysis
First, we compare the value relevance of segment reporting under the IFRS 8 period
(2009–2010) to that during the IAS 14 period (2007–2008). Table 4 presents the
empirical findings. Results are based on a pooled OLS regression. We use
heteroscedasticity- and autocorrelation-consistent variance estimators. Alterna-
tively, we cluster standard errors at the firm-level, which does not change results
13
The latter are firms that use an entirely different way of segmentation, but they happen to have the
same number of segments.
14
We also use (but do not tabulate) Pearson instead of Spearman rank correlation coefficients, which
point to evidence in the same direction.
40
TABLE 3
CORRELATION MATRIX
Price Cons_ Cons_ Segment_ Segment_ Segment_ Segment_ Segment_ Segment_

earnings equity earnings1 earnings2 earnings3 equity1 equity2 equity3
Price 1 0.655*** 0.723*** 0.494*** 0.485*** 0.393*** 0.386*** 0.402*** 0.210

Cons_earnings 0.623*** 1 0.523*** 0.684*** 0.608*** 0.447*** 0.245 0.202 0.213
Cons_equity 0.592*** 0.685*** 1 0.415*** 0.480*** 0.419*** 0.614*** 0.600*** 0.187
41
Segment_earnings1 0.478*** 0.746*** 0.680*** 1 0.335*** 0.017 0.312*** 0.114 0.019
Segment_earnings2 0.426*** 0.551*** 0.438*** 0.347*** 1 0.070 0.259*** 0.488*** 0.041
Segment_earnings3 0.290*** 0.313*** 0.378*** 0.033 0.024 1 0.016 0.094* 0.458***
Segment_equity1 0.480*** 0.565*** 0.761*** 0.583*** 0.409*** 0.248*** 1 0.434*** 0.426***
Segment_equity2 0.340*** 0.373*** 0.621*** 0.455*** 0.470*** 0.142* 0.550*** 1 0.317***
Segment_equity3 0.074 0.089 0.029 0.009 0.075 0.192** 0.392*** 0.443*** 1
Table 3 presents the Spearman correlation coefficients. IFRS 8 variables are above the diagonal and IAS 14 variables are below the diagonal. The variable
Price is stock price 90 days after fiscal year-end. The variable Cons_equity represents the consolidated book value of equity. Cons_earnings is the consolidated
net income. Segment_earnings1–Segment_earnings3 and Segment_equity1–Segment_equity3 are the respective segment values. *, **, and *** indicate statis-
tical significance at the 10%, 5%, and 1% levels, respectively.

TABLE 4
VALUE RELEVANCE PRE AND POST ADOPTION OF IFRS 8
Panel A Panel B Panel C
VARIABLES Model 1 Model 1 Model 2 Model 2 Model 2a Model 2a Model 3 Model 3 Model 3a Model 3a
IAS 14 IFRS 8 IAS 14 IFRS 8 IAS 14 IFRS 8 IAS 14 IFRS 8 IAS 14 IFRS 8
Segment_ 1.175 0.181 0.990 0.131 0.480 0.552 0.457 0.820

earnings1 (+) (1.247) (0.181) (0.928) (0.121) (0.443) (0.628) (0.379) (0.901)
Segment_ 5.175*** 5.533*** 5.206** 5.980*** 5.458*** 2.287* 6.391** 2.623
earnings2 (+) (2.918) (4.228) (2.301) (3.508) (2.641) (1.406) (1.924) (1.036)
Segment_ 3.501*** 4.276*** 3.485** 4.955*** 4.933*** 4.038*** 4.742*** 3.981***
earnings3 (+) (2.500) (3.659) (2.293) (3.998) (3.326) (2.973) (2.747) (2.798)
Loss1* 4.709 12.448* 5.891 27.156**
Segment_ (0.404) (1.310) (0.590) (2.012)
earnings1 ()

Loss2* 1.241 8.622*** 1.126 4.490
42
Segment_ (0.409) (2.547) (0.213) (0.622)
earnings2 ()
ABACUS
Loss3* 4.108* 5.514** 0.810 0.835

Segment_ (1.434) (2.083) (0.243) (0.208)
earnings3 ()
Loss1 () 2.430 11.842* 5.037 14.502
(0.277) (1.536) (0.614) (0.978)
Loss2 () 1.719 7.088** 6.488 8.630*
(0.395) (1.962) (1.117) (1.598)
Loss3 () 7.090** 3.016 11.205** 4.898
(2.002) (0.784) (2.216) (0.763)
Segment_ 0.017 0.043 0.042 0.008
equity1 (+) (0.133) (0.423) (0.282) (0.075)
Segment_ 0.368 1.095*** 0.594 0.743*
equity2 (+) (0.582) (2.911) (0.718) (1.482)
Segment_ 0.151 0.768***
equity3 (+) (0.365) (2.837)
TABLE 4
CONTINUED
Panel A Panel B Panel C
VARIABLES Model 1 Model 1 Model 2 Model 2 Model 2a Model 2a Model 3 Model 3 Model 3a Model 3a
IAS 14 IFRS 8 IAS 14 IFRS 8 IAS 14 IFRS 8 IAS 14 IFRS 8 IAS 14 IFRS 8
0.195 0.678***
(0.418) (2.544)
Cons_ 3.899*** 3.334***
earnings (+) (3.518) (2.625)
Cons_ 0.080 0.191* 0.011 0.201** 0.003 0.115
equity (+) (0.494) (1.434) (0.066) (1.686) (0.020) (0.866)
43
Constant 14.589*** 22.035*** 14.970*** 20.730*** 16.418*** 21.488*** 19.192*** 20.402*** 21.965*** 24.642***
(6.653) (9.539) (6.109) (10.642) (5.393) (8.657) (5.812) (6.827) (5.557) (6.069)
Observations 140 140 140 140 140 140 94 94 94 94
Adj. R-squared 0.388 0.373 0.376 0.512 0.388 0.558 0.324 0.501 0.359 0.548
Table 4 presents the OLS regression results of the consolidated (1) and segment models (2, 2a, 3, 3a) separately under IAS 14 and IFRS 8. The dependent
variable P is stock price 90 days after fiscal year-end. The variable Cons_equity represents the consolidated book value of equity. Cons_earnings is the
consolidated net income. Segment_earnings1–Segment_earnings3 and Segment_equity1–Segment_equity3 are the respective segment values.
Loss1*Segment_earnings1–Loss3*Segment_earnings3 are segment earnings interacted with loss dummy variables for the respective segments. The predicted
signs are presented below the variables in parentheses. The table reports OLS coefficient estimates and t-statistics in parentheses based on heteroscedasticity
and autocorrelation consistent standard errors. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels (one-tailed), respectively.

ABACUS
or inferences. Moreover, we winsorize all variables at their 1 and 99 percentile level

to mitigate the effect of outliers.15
Earnings and equity coefficients are expected to be positive, whereas loss
response coefficients should be negative.16 Results are subdivided into three panels.
Panel A shows the simplified Ohlson model on the consolidated firm-level. Panel B
reports the segment models with segment-level earnings and consolidated equity
while Panel C also breaks down equity to segment level.
Model (1) shows the basic consolidated Ohlson model. Earnings are highly
significant in both periods with p-values of <0.01 while equity is only significant at
the 0.10 level for the IFRS 8 period. On average, there is a slight decrease in the
adjusted R2 from the IAS 14 period (38.8%) to the IFRS 8 period (37.3%).
Running yearly regressions shows that the consolidated model (1) yields an
explanatory power of 39.4% in 2007, 45.4% in 2008, and just 26% in 2009. This
trend is possibly due to the aftermath of the global financial crisis which caused
substantial uncertainties at the capital markets. By 2010, however, there is a
recovery of the value relevance of consolidated financial statements (adjusted R2
= 47.6%). This general trend in the value relevance of aggregated financial
information should be kept in mind when analyzing the value relevance of segment
reports in the IAS 14 and IFRS 8 periods.
Panel B reports the results of models (2) and (2a) each under both standards.
Model (2) incorporates consolidated equity- and segment-level earnings. The
segment-level earnings of segments two and three are highly significant at the 0.01
level under both standards. The equity response coefficient is insignificant under
IAS 14 and significant at the 0.05 level under IFRS 8. Contrary to the consolidated
models, the adjusted R2 is substantially higher in the IFRS 8 period (51.2%)
compared to the IAS 14 period (37.6%), indicating an increase in the value
relevance of segment earnings under IFRS 8. Model (2a) employs segment loss
dummies to control for any potential non-linearity in the response coefficients for
loss-making segments (Hayn, 1995). The results, however, are very similar to model
(2). Segment earnings are significant for segment two and three at the 0.01 level
under IFRS 8 and at the 0.05 level under IAS 14. The loss-interaction terms are only
significant under IFRS 8. The discrepancy in explanatory power even increases with
an adjusted R2 of 55.8% for the IFRS 8 period and 38.8% for IAS 14. Also note that
segment information under IAS 14 is not incrementally useful to consolidated
financial statements information. This, however, changes upon adoption of IFRS 8
when the explanatory power of segment models exceeds that of the consolidated
model.
Panel C presents the results for models (3) and (3a), which employ equity and
earnings on a segment basis. The number of observations decreases to 94 firms un-
der either standard as some firms do not report assets and liabilities to proxy for
15
However, inferences without winsorizing are virtually the same except for the slightly lower explan-
atory power of the models.
16
One-tailed t-tests of coefficients are used if the respective variable has a predicted sign and two-tailed
tests otherwise.
44
equity at the segment level.17 These observations are removed from the sample.
Segment equity is insignificant under IAS 14. However, it is highly significant at
the 0.01 level for segment two and three under IFRS 8. This may be due to the fact
that in case an entity reports segment equity in its IFRS 8 segment report, it is
actually an item reported to and used by management. Again, there is a substantial
increase in the explanatory power of the segment models (3) (32.4% to 50.1%) and
(3a) (35.9% to 54.8%) from the IAS 14 to the IFRS 8 period signalling higher value
relevance of segment reports under the new standard.
We also re-run all regressions based on just one year before (2008) and one year
after (2009) IFRS 8’s adoption. Although this cuts our sample sizes in half, we find
similar results and inferences supporting an increase in the value relevance of
segment reports under IFRS 8.
The increase in value relevance after the adoption of IFRS 8 has to be interpreted
carefully. It could be driven by any confounding time effects such as the introduction
of other regulations or general economic trends that might impact value relevance.
The fact that there was no change in the general value relevance of consolidated
financial statements, however, contradicts the notion of general economic trends
causing the increase in the value relevance of segment reporting. Moreover, there
were no other segment reporting-related regulations enacted in the period of our
analysis. Finally, note that the overall explanatory power of the valuation models
of segment information under IAS 14 is very similar to those of the consolidated
financial statements information. Hence, there is no superior value relevance of
IAS 14 segment reports compared to consolidated numbers. This is different under
IFRS 8: segment information under the management approach shows superior
value relevance compared to aggregated financial statements information.
Difference-in-differences Analysis
Nonetheless, to rule out alternative explanations that could be driving our results,
we exploit the unique setting of the introduction of IFRS 8. There is a substantial
number of firms that already reported in compliance with the management
approach under IAS 14 and thus were unaffected by the introduction of IFRS 8
(no change firms). This allows for a difference-in-differences design that controls
for confounding time effects. Firms that had to change their segmentation upon
IFRS 8 adoption (change firms) are exposed to the same economic environment
as no change firms. When assuming that the adoption of the new standard is
17
Because the disclosure of segment assets and liabilities was mandatory under IAS 14, the decline in
sample size is largely driven by firms that stop to report either segment assets or liabilities under
IFRS 8. We retain a balanced sample and only use firms that provide sufficient data to proxy for segment
equity under both standards. We acknowledge that this is likely a biased sub-sample of the firms in the
earnings-only models because the disclosure choice is not random. The sub-sample includes firms that
deem segment equity an important piece of information and also use it for internal decision making.
Therefore, the value relevance of segment equity is likely overstated in these models. Results, however,
show that, even with this upward bias, equity does not provide much explanatory power incremental to
segment earnings. Hence, we are not overly concerned about this sample bias. Moreover, the analysis of
segment equity is rather supplementary to the earnings-only models.
45
ABACUS
exogenous, we have a quasi-natural experiment with the change firms being the
treatment group and the no change firms the control group.18
Table 5 reports the results for the difference-in-differences analysis. For each of
the segment models (2), (2a), (3), and (3a), we run four regressions. First, we split
the sample according to the treatment (change) and the control group (no change).
Then we compare the value relevance of segment reporting pre and post the adop-
tion of the new standard for each group. In theory, there should not be a difference
for the no change group from the IFRS 8 to the IAS 14 period apart from general
time effects. However, if there is an improvement in the decision usefulness of seg-
ment reporting due to the introduction of IFRS 8 and the management approach,
the change group should be affected. Again, we focus on the adjusted R2 as an ag-
gregated measure of value relevance. The significance levels of segment earnings
and equity, however, provide corresponding findings.
Models (2) and (2a) show that the no change firms experienced a relatively mod-
est increase in the value relevance from IAS 14 to IFRS 8 (+10.3 percentage points
in adjusted R2 for model (2); +12.3 percentage points for model (2a)). In contrast,
the treatment group of change firms shows a substantial increase in explanatory
power of +30.1 percentage points for model (2) and +33.0 percentage points for
model (2a). The difference-in-differences in adjusted R2 of +19.8 percentage points
for model (2) and +20.7 percentage points for model (2a) show a large incremental
improvement in the value relevance of segment reports for those firms that had to
change their segmentation upon the adoption of IFRS 8 and as they moved from
the risk-and-reward to the management approach. The results are even stronger
for model (3) and model (3a): while the control group does not experience much
of a change in adjusted R2 (+4.8 percentage points for model (3) and +6.9 percent-
age points for model (3a)), the treatment group shows an increase of more than
+31.6 percentage points for model (3) and +25.8 percentage points for model (3a)
upon adoption of IFRS 8. This supports the notion that the improvement in the
value relevance of segment reporting is driven by the adoption of the new rule
and not by other concurrent developments. Otherwise there should not have been
such a substantial difference between the treatment and the control groups as
companies switched from IAS 14 to IFRS 8.19
Lag-adoption Year Analysis

We also exploit the fact that firms must provide information for the current and pre-
vious year in their financial statements based on the current accounting standards.
18
This assumption seems reasonable as the application of the new standard is mandatory. However, if
entities could use discretion to choose whether they comply with the new reporting rules or not
(hence, self-select into the change or no-change group), the treatment would be endogenous. Yet,
the auditor should ensure that a firm properly applies accounting rules.
19
There might be firms that already reported in line with the management approach and just coinciden-
tally changed their internal reporting at the same time of IFRS 8 adoption. These firms would be
falsely flagged as change firms. However, we have searched all annual reports for any signs that
may indicate this and did not find anything.
46
TABLE 5
DIFFERENCE-IN-DIFFERENCES ANALYSIS
(2) (2) (2) (2) (2a) (2a) (2a) (2a)

VARIABLES No change No change Change Change No change No change Change Change
IAS 14 IFRS 8 IAS 14 IFRS 8 IAS 14 IFRS 8 IAS 14 IFRS 8
Segment_earnings1 2.480** 1.085 0.268 2.159 2.138 1.417 0.305 1.609

Segment_earnings2 3.111* 2.145** 6.448** 5.746*** 1.604 0.981 7.692** 7.699***
Segment_earnings3 3.966** 4.228** 3.761* 6.398*** 3.774** 5.244** 3.042 6.053***
Loss1* Segment_earnings1 22.498** 4.870 8.241 35.516***
Loss2* Segment_earnings2 4.863 0.839 1.638 12.209***
Loss3* Segment_earnings3 4.572 6.787*** 0.248 1.825
Loss1 14.129 5.441 3.859 26.354***
Loss2 2.424 4.681 11.036 4.651
Loss3 6.663 2.117 13.365** 9.449**
Cons_equity 0.093 0.578** 0.033 0.222*** 0.273 0.573** 0.026 0.143**
Constant 9.904*** 15.473*** 17.720*** 19.816*** 11.018** 16.868*** 18.233*** 20.291***
Observations 84 84 56 56 84 84 56 56
Adj. R-squared 0.410 0.513 0.396 0.697 0.436 0.559 0.441 0.771
47
Δ in Adj. +0.103 +0.301 +0.123 +0.330
R-squared
Diff-in-diff. +0.198 +0.207
Adj. R-squared
(3) (3) (3) (3) (3a) (3a) (3a) (3a)

No change No change Change Change No change No change Change Change
VARIABLES IAS 14 IFRS 8 IAS 14 IFRS 8 IAS 14 IFRS 8 IAS 14 IFRS 8
Segment_earnings1 0.665 0.608 0.654 1.434 0.654 0.100 1.270 0.168

Segment_earnings2 1.606 2.542* 13.477*** 3.096* 1.522 3.496 21.763*** 6.952*
Segment_earnings3 5.051*** 5.474** 3.443** 5.133*** 4.539** 5.012* 3.069* 4.230**
Loss1* Segment_earnings1 184.328** 18.063 2.737 49.980***
Loss2* Segment_earnings2 0.990 7.516 9.076 9.270

Loss3* Segment_earnings3 8.695 3.171 8.399** 0.981
Loss1 10.900 11.508 17.626* 43.380***

TABLE 5
CONTINUED
Loss2 1.738 7.759 30.120 1.940
Loss3 3.237 12.342 20.228*** 10.960***
Segment_equity1 0.347 0.546** 0.055 0.132** 0.279 0.583* 0.013 0.059
Segment_equity2 0.705 0.330 0.820* 2.139*** 0.659 0.876 0.063 1.987***
Segment_equity3 0.031 0.288 0.153 0.871*** 0.039 0.183 0.386 1.082***
Constant 21.201*** 27.460*** 8.040** 13.535*** 24.223*** 35.583*** 1.051 11.320**
Observations 52 52 42 42 52 52 42 42
Adj. R-squared 0.350 0.398 0.510 0.826 0.387 0.456 0.633 0.891
Δ in Adj. +0.048 +0.316 +0.069 +0.258

R-squared

Diff-in-diff
48
+0.268 +0.189
Adj. R-squared
ABACUS
Table 5 presents the OLS regression results for the difference-in-differences analysis. For each segment model (2, 2a, 3, 3a), we report four regression models:
pre- and post-IFRS 8 for both the control group (no change) and the treatment group (change). For brevity, we do not report the t-values under the coefficient
estimates. The dependent variable Price is stock price 90 days after fiscal year-end. The variable Cons-equity represents the consolidated book value of equity.
Cons_earnings is the consolidated net income. Earnings1–Earnings3 and Equity1–Equity3 are the respective segment values. Loss1*Segment_earnings1–
Loss3*Segment_earnings3 are segment earnings interacted with loss dummy variables for the respective segments. The predicted signs are presented below
the variables in parentheses. The table reports OLS coefficient estimates based on heteroscedasticity and autocorrelation consistent standard errors. *, **,
and *** indicate statistical significance at the 10%, 5%, and 1% levels (one-tailed), respectively.
This means that in the first year of IFRS 8’s adoption, the segment report for the
previous year had to be presented according to the new requirements (lag-adoption
year). In addition to the previous analysis in the simple pre/post setting and the
difference-in-differences design, we can use a unique data set of segment
information according to IFRS 8 and IAS 14, each for the same year. The same
sample selection criteria apply as for the basic panel. For the analysis, we compare
the value relevance of segment earnings and equity for two sub-samples of IFRS 8
and IAS 14 segment reports of the same year. Consequently, if differences are
identified based on this data set, it is highly likely that these are due to the
dissimilarity of the standards.
Model (2) incorporates consolidated equity and segment earnings. The results in
Table 6 show a higher explanatory power for the model incorporating data based on
the new standard. The adjusted R2 for IFRS 8 data is 53.3% compared to 36.7% of
IAS 14 and the IFRS 8 subsample shows two highly significant segment earnings
coefficients compared to just one under IAS 14. Loss dummies (model (2a))
enhance the explanatory power for both sub-samples. Adjusted R2 statistics also
supply evidence in favour of IFRS 8 (61.9%) compared to IAS 14 (44.4%) in terms
of explanatory power. We employ a Vuong test (Vuong, 1989), which is a likelihood
ratio-based test and is applicable for comparing non-nested or overlapping models,
to check whether the difference in the explanatory power of the IFRS 8 and IAS 14
models is significant. We find that both models ((2) and (2a)) perform significantly
better under IFRS 8 at the 0.05 level. Moreover, comparing the segment models
(3) and (3a) shows similar results in favour of IFRS 8. The adjusted R2 based on
model (3) is significantly higher under IFRS 8 with 65.1% compared to 38.8% under
IAS 14. Using model (3a), there is a difference of +23.3 percentage points in
adjusted R2 for IFRS 8 segment data. Both of these differences in adjusted R2 are
significant at the 0.01% level. These results once more provide evidence for a supe-
rior association of market value and segment data based on IFRS 8 as compared to
IAS 14 and thus for the higher value relevance of the former. This test indicates that
some of the information under IFRS 8 was already known through other channels
before its disclosure in the segment report.
Supplementary Information Asymmetry Analysis

Given the critique of the value relevance approach (e.g., Holthausen and Watts,
2001), we also use a supplementary analysis of information asymmetries to
gauge the usefulness of segment reports under the management approach for
investors. Following Blanco et al. (2015), we believe that segment reports under
the management approach impact information asymmetry through two channels.
First, an improvement in a firm’s information environment permits a more
precise estimation of future cash flows and thereby leads to a reduction in
estimation risk. Second, more useful segment information allows better and
cheaper monitoring of management, in particular, when investors receive
information ‘through the eyes of management’. However, information asymme-
try will only be affected if the adoption of the management approach led to
more useful information.
49
TABLE 6
LAG-ADOPTION YEAR ANALYSIS
VARIABLES Model 2 Model 2 Model 2a Model 2a Model 3 Model 3 Model 3a Model 3a

Segment_earnings1 (+) 0.462 0.960 0.907 1.893** 0.175 1.496* 0.097 1.285
(0.463) (1.104) (0.790) (2.062) (0.134) (1.504) (0.069) (1.148)
Segment_earnings2 (+) 2.511*** 1.561*** 3.870** 0.602 3.390** 1.694** 6.445** 1.345
(2.486) (3.823) (2.062) (0.585) (2.272) (2.346) (2.117) (0.531)
Segment_earnings3 (+) 1.566 3.643*** 2.749** 4.982*** 4.016*** 5.189*** 4.390** 4.628**
(1.098) (3.458) (2.360) (4.762) (2.630) (3.349) (2.358) (2.361)

Loss1* Segment_ 42.195 55.301 14.298 106.572
50
earnings1 () (2.231) (4.318) (0.764) (1.528)
Loss2* Segment_ 2.525 1.134 5.388* 0.554
ABACUS
earnings2 () (1.250) (0.982) (1.368) (0.159)

Loss3* Segment_ 5.356 7.299*** 2.956 8.070
earnings3 () (1.290) (2.559) (0.484) (0.762)
Loss1 () 14.722 7.215 3.174 8.799
(1.237) (0.873) (0.243) (0.733)
Loss2 () 0.854 3.433 8.945* 3.706
(0.226) (1.243) (1.447) (0.989)
Loss3 () 4.480 6.628** 8.989 8.675
(1.075) (1.936) (1.229) (0.759)
Segment_equity1 (+) 0.092 0.124 0.070 0.144
(0.679) (1.233) (0.415) (1.179)
TABLE 6
CONTINUED
VARIABLES Model 2 Model 2 Model 2a Model 2a Model 3 Model 3 Model 3a Model 3a

Segment_equity2 (+) 0.538 0.238 1.101* 0.100

(1.114) (0.512) (1.445) (0.121)
Segment_equity3 (+) 0.254 0.131 0.466 0.255
(0.641) (0.328) (0.836) (0.435)
Cons_equity (+) 0.128 0.090 0.047 0.069
(0.702) (0.746) (0.348) (0.631)
Constant 10.662*** 9.463*** 10.393*** 10.825*** 14.681*** 9.974*** 14.806*** 10.513***
(4.970) (4.768) (3.766) (4.615) (5.155) (5.006) (4.683) (4.227)
51
Vuong test 1.794* 2.161** 2.569*** 2.172**
p-value 0.073 0.015 0.005 0.015
Observations 70 70 70 70 47 47 47 47
Adj. R-squared 0.367 0.533 0.423 0.616 0.388 0.651 0.478 0.670
Table 6 presents the OLS regression results for the segment models (2, 2a, 3, 3a) based on segment reports for the last year of IAS 14 and for segment reports
of the same year and the same firms under IFRS 8 (lag-adoption year). The dependent variable Price is stock price 90 days after fiscal year-end. The variable
Cons_equity represents the consolidated book value of equity. Cons_earnings is the consolidated net income. Segment_earnings1–Segment_earnings3 and
Segment_equity1–Segment_equity3 are the respective segment values. Loss1*Segment_earnings1–Loss3*Segment_earnings3 are segment earnings interacted
with loss dummy variables for the respective segments. The predicted signs are presented below the variables in parentheses. The table reports OLS coefficient
estimates and t-statistics in parentheses based on heteroscedasticity and autocorrelation consistent standard errors. We report the z-values in the first column
of the Vuong test and the p-values below. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels (one-tailed), respectively.

ABACUS
Owing to its strong theoretical foundation, we use bid-ask spreads to capture

information asymmetries. Similar to prior literature (e.g., Daske et al., 2008), we
measure bid-ask spreads as the median of the difference between the daily closing
bid and ask prices divided by the midpoint for the nine-month period starting 90
days after fiscal year-end. In a difference-in-differences setting, we compare
bid-ask spreads of our change and no change firms before and after the adoption
of IFRS 8. In Panel A of Table 7, we compare the mean bid-ask spreads of our
control group and our treatment group the year before and the year after IFRS 8’s
adoption. Spreads are very similar in the pre-adoption period with an average of
0.665% for the treatment group and 0.696% for the control group. In 2009, the
treatment group experiences a decline in spreads of 0.030 percentage points while
the spreads of the control group increase by 0.077 percentage points. The difference-
in-differences of 0.107% is marginally insignificant which may be due to the small
sample sizes in each bin.20 Extending the pre- and post-adoption period to two
years each and thereby increasing the power of our estimation, we find a
significant difference-in-differences of 0.044%. The results of the spread analysis
support the initial findings that firms adopting the management approach experi-
ence an improvement in the usefulness of segment reports.
ADDITIONAL ANALYSES AND ROBUSTNESS TESTS
To check the sensitivity of the results, we perform several additional analyses and
robustness tests. The results of alternative specifications will not be discussed in
depth if they are similar to the primary findings. However, significant differences
are highlighted.
Two Segment Models

Initial results are based on valuation models that employ variables for three seg-
ments. To check whether the results are sensitive to the number of segments
employed in the valuation models, we also estimate models based on two and four
segments. Results are similar for all three different steps and conclusions remain un-
changed. Four segment models, however, substantially decrease the sample size and
should thus be interpreted carefully.
Variation of the Dependent Variable

Veith and Werner (2014) show that the choice of the return window can substan-
tially impact the findings of value-relevance studies. We use stock price 90 days after
fiscal year-end as the dependent variable in the original model. To ensure that the
results are not driven by a specific event on that day, we also employ the mean stock
20
We lose four observations in our treatment group and one observation in our control group due to
missing spread data resulting in 24 treatment firms and 41 control firms. The magnitude of the differ-
ence, however, is still economically meaningful.
52
TABLE 7
INFORMATION ASYMMETRY ANALYSIS
Bid-ask spread IAS 14 IFRS 8

Panel A 2008/2009 (Pre adoption) (Post adoption)
(a) (b) (b)–(a)
Change firms (i) 0.665% 0.635% 0.030%

(n=24 firm-years)
No change firms (ii) 0.696% 0.773% +0.077%
(n=41 firm-years)
(i)–(ii) 0.031% 0.138% 0.107%
Bid-ask spread IAS 14 IFRS 8

Panel B 2007–2010 (Pre adoption) (Post adoption)
(a) (b) (b) – (a)
Change firms (i) 0.584% 0.606% +0.022%

(n=48 firm-years)
No change firms (ii) 0.627% 0.693% +0.066%
(n=82 firm-years)
(i)–(ii) 0.043% 0.087% 0.044%*
Table 7 presents the information asymmetry analysis based on the difference-in-differences design. Panel A
reports mean values of bid-ask spreads for the change firms (treatment group) and no change firms (control
group) before (2008) and after (2009) the adoption of IFRS 8. Panel B uses two-year windows for the IAS
14 period (2007–2008) and the IFRS 8 period (2009–2010). Bid-ask spread is measured as the median of the
difference between the daily closing bid and ask prices divided by the midpoint for the nine-month period
starting 90 days after fiscal year-end. *, **, and *** indicate statistical significance of differences in means at
the 10%, 5%, and 1% levels, respectively, based on non-parametric ranksum tests. We assess the statistical
significance of the difference-in-differences value (i.e., the lower right-hand side number) by comparing the
means of firm-level changes from the IAS 14 to the IFRS 8 period using non-parametric ranksum tests.
price of a 20-day window (80–100 days after fiscal year-end) as a robustness check.
Additionally, following other value-relevance studies (e.g., Giner and Reverte, 1999;
Cazavan-Jeny and Jeanjean, 2006; Al Jifri and Citron, 2009), we use stock price at
fiscal year-end (t=0). Neither of the alternative dependent variables leads to
different results compared to the original models. Moreover, the results of Veith
and Werner (2014) also indicate that the return window that maximizes the adjusted
R2 of value relevance regressions differs between countries. In Germany, capital
markets seem to take longer to fully impound financial information into prices.
Hence, we also re-run all regressions with stock prices 120 and 150 days after fiscal
year-end. Yet, our results and inferences remain unchanged.
Additional Controls
Prior research has found several factors that moderate value relevance on the
consolidated level. For instance, Collins and Kothari (1989) find a significant
association of the earnings response coefficient with the growth opportunities and
risk of a firm. They suggest to proxy for growth opportunities by the market-to-book
value of equity and for the riskiness of earnings by common stock betas. They
provide evidence that the statistical association is significantly understated if one
53
ABACUS
fails to control for growth opportunities. Hence, we incorporate these variables in

our regression models. Once again, the general explanatory power of all specifica-
tions increases, but results and inferences are very similar.
Geographical Segmentation and Outlier Treatment

About 15% of our sample firms use geographical segments as their primary segmen-
tation. To ensure that results are insensitive to the type of segmentation employed,
we also estimate all regressions only based on line-of-business firms. Again, this
does not change our results.
Beyond these alternative specifications, we carry out some outlier detection tests
as prior research indicates that extreme observations potentially cause a non-linear
relationship between security prices and earnings (Wysocki, 1998). Following, for
instance, Ali and Zarowin (1992), extreme observations might include value-
irrelevant or transitory elements, which could have an undue impact on the findings.
However, removing observations from our sample flagged as outliers based on
Cook’s Distance (Cook, 1977) does not change the general tenor of our results.
Multicollinearity
The correlation matrix in Table 3 indicates a certain degree of pairwise collinearity
between the independent variables. Because pairwise correlation coefficients are
not sufficient to check for the presence of multicollinearity, we analyze the variance
inflation factors (VIFs) of all our models. In most specifications, the VIFs are below
five suggesting no harmful multicollinearity. Yet, in a few models the VIFs exceed
10. The standard errors of those coefficients could be inflated and thus make it more
difficult to find statistically significant coefficients. However, this is not a major issue
in this study because we are primarily interested in the overall explanatory power of
the valuation models rather than the significance level of single coefficients. In addi-
tion, we employ a procedure which suggests that weak (strong) multicollinearity is
associated with condition indices around 5–10 (30–100) and the variance decompo-
sition proportion is beyond 50% for more than two coefficient variances of the
respective eigenvalue. In this case, condition indices and eigenvalues indicate that
strong multicollinearity is not a problem in any of our specifications.
CONCLUSIONS
Our findings show that segment information according to IFRS 8 is more value
relevant and reduces information asymmetry compared to segment data reported
under IAS 14. The benefits of the new segment reporting requirements for investors
seem to outweigh their potential drawbacks (e.g., less comparability between firms),
a finding which is of interest to the IASB and other standard setters considering
changes in segment reporting rules. All in all, financial accounting information
‘through the eyes of management’ appears to increase the value of information from
an investor’s perspective. Moreover, it might also be of interest to standard setters
that the value relevance of segment reports under IAS 14 is largely driven by
54
segment earnings rather than equity. Under IFRS 8, in contrast, segment equity
yields explanatory power in our valuation models. This is in line with the fact that
only firms that report segment assets and segment liabilities internally need to dis-
close them under IFRS 8. This also supports the decision of the IASB to remove
the mandatory disclosure of segment assets in the amendments of IFRS 8 through
the annual improvements to IFRS in 2009.
However, some limitations remain. Inherent assumptions of the value relevance
framework limit our inferences to the relevance and reliability of segment reporting
from an investor’s perspective. Additionally, we focus on German firms. We
intentionally chose the German setting as we expected a particularly pronounced
impact of introducing IFRS 8 due to Germany’s tradition of maintaining separate
records for financial reporting and managerial accounting purposes. We acknowl-
edge that IFRS-applying countries such as Australia, Canada, or Hong Kong, which
are very different in terms of culture, may be affected differently. In particular, the
introduction of the management approach may be evaluated in a different way due
to differences in the perceived reliability of segment information based on internally
used figures. However, we leave this aspect for future research.
Finally, the comparison of the two segment reporting standards is based on data
from the first two years of IFRS 8 adoption. Although this provided a unique setting
for the analysis, firms as well as their respective auditors may not have been fully
accustomed to the new requirements. Hence, differences found between IFRS 8
and IAS 14 can be due to unique effects which abate once companies and auditors
gain more experience. On the other hand, these differences may well increase.
The convergence of IFRS and US-GAAP segment standards led to identical
segment reporting requirements for numerous countries and firms worldwide. We
provide empirical evidence on the superior usefulness of segment disclosures under
IFRS 8 compared to IAS 14 for investors. While this study sheds light on the
potential benefits of IFRS 8, future studies could analyze the costs of adopting
IFRS 8. This is particularly interesting given the proprietary nature of informa-
tion ‘through the eyes of management’ (Martin, 1997).
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ABACUS, Vol. 53, No. 1, 2017 doi: 10.1111/abac.12105

PETER KAJÜTER AND MARTIN NIENHAUS

The Impact of IFRS 8 Adoption on the

We analyze the impact of IFRS 8 on the usefulness of segment reports

Despite the widely acknowledged relevance of segment reporting (e.g., Brown,

PETER KAJÜTER and MARTIN NIENHAUS (martin.nienhaus@wiwi.uni-muenster.de) are with University of

Segment reporting requirements were substantially changed with the adoption of

THEORY AND PRIOR RESEARCH

Following the IFRS Conceptual Framework, financial information is decision

approach to segment reporting implies an emphasis of relevance over

RESEARCH DESIGN AND SAMPLE

Pricet;i ¼ α þ β1 Cons equityt;i þ β2 Cons earningst;i þ ϵt;i (1)

all publicly available information.6 Furthermore, we use net income of continued

Pricet;i ¼ α þ β1 Cons equityt;i þ γ1 Segment earnings1t;i þ γ2 Segment earnings2t;i (2)

Pricet;i ¼ α þ δ1 Segment equity1t;i þ δ2 Segment equity2t;i þ δ3 Segment equity3t;i (3)

Pricet;i ¼ α þ β1 Cons equityt;i þ γ1 Segment earnings1t;i þ γ2 Segment earnings2t;i (2a)

Pricet;i ¼ α þ δ1 Segment equity1t;i þ δ2 Segment equity2t;i þ δ3 Segment equity3t;i

Initial sample of HDAX + SDAX entities 2007–2010 160 640

• no firms from banking, insurance, or financial services industries;11

In million Euros Mean Std. Dev. Min. Median Max.

Price 31.80 34.43 0.53 21.31 250

© 2017 Accounting Foundation, The University of Sydney

COMPARISON OF THE VALUE RELEVANCE OF SEGMENT REPORTING

Price Cons_ Cons_ Segment_ Segment_ Segment_ Segment_ Segment_ Segment_

Price 1 0.655*** 0.723*** 0.494*** 0.485*** 0.393*** 0.386*** 0.402*** 0.210

© 2017 Accounting Foundation, The University of Sydney

Panel A Panel B Panel C

Segment_ 1.175 0.181 0.990 0.131 0.480 0.552 0.457 0.820

© 2017 Accounting Foundation, The University of Sydney

Loss3* 4.108* 5.514** 0.810 0.835

Panel A Panel B Panel C

© 2017 Accounting Foundation, The University of Sydney

or inferences. Moreover, we winsorize all variables at their 1 and 99 percentile level

Lag-adoption Year Analysis

(2) (2) (2) (2) (2a) (2a) (2a) (2a)

Segment_earnings1 2.480** 1.085 0.268 2.159 2.138 1.417 0.305 1.609

(3) (3) (3) (3) (3a) (3a) (3a) (3a)

Segment_earnings1 0.665 0.608 0.654 1.434 0.654 0.100 1.270 0.168

Loss2* Segment_earnings2 0.990 7.516 9.076 9.270

© 2017 Accounting Foundation, The University of Sydney

Δ in Adj. +0.048 +0.316 +0.069 +0.258

© 2017 Accounting Foundation, The University of Sydney

Supplementary Information Asymmetry Analysis

VARIABLES Model 2 Model 2 Model 2a Model 2a Model 3 Model 3 Model 3a Model 3a

© 2017 Accounting Foundation, The University of Sydney

earnings2 () (1.250) (0.982) (1.368) (0.159)

VARIABLES Model 2 Model 2 Model 2a Model 2a Model 3 Model 3 Model 3a Model 3a

Segment_equity2 (+) 0.538 0.238 1.101* 0.100

© 2017 Accounting Foundation, The University of Sydney

Owing to its strong theoretical foundation, we use bid-ask spreads to capture

ADDITIONAL ANALYSES AND ROBUSTNESS TESTS

Two Segment Models

Variation of the Dependent Variable

Bid-ask spread IAS 14 IFRS 8

Change firms (i) 0.665% 0.635% 0.030%

Bid-ask spread IAS 14 IFRS 8

Change firms (i) 0.584% 0.606% +0.022%

fails to control for growth opportunities. Hence, we incorporate these variables in

Geographical Segmentation and Outlier Treatment

Maines, L. A., L. S. McDaniel, and M. S. Harris (1997), ‘Implications of Proposed Segment

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