Title: On the credibility of intersegment revenues and the persistence of segment earnings

Authors: Yingxu Kuang; Xiaoyan Chu; Yu Zhang

Addresses: School of Business Administration, University of Houston-Victoria, 3007 N. Ben Wilson, Victoria, Texas 77901, USA ' College of Business Administration, Nicholls State University, 132 Powell Hall, Thibodaux, LA 70310, USA ' College of Business Administration, Nicholls State University, 132 Powell Hall, Thibodaux, LA 70310, USA

Abstract: SFAS 131 that governs segment reporting requires disclosing profits/losses of reportable segments in multi-segment firms. By definition, segment profit/loss consists of income from both external transactions and intersegment transactions. Owing to the discretionary nature of the intersegment transactions, we suspect that management uses intersegment revenues to manipulate segment earnings. Examining the credibility of intersegment revenues relative to that of external revenues, we find the following: i) intersegment revenues have lower persistence than external revenues; ii) discretionary intersegment revenues have lower persistence than non-discretionary intersegment revenues and iii) the magnitude of discretionary intersegment revenues is consistent with the goal of maximising firm value.

Keywords: SFAS 131; segment earnings; intersegment revenue; earnings persistence; credibility; segment reporting; external revenue; firm value.

DOI: 10.1504/IJAAPE.2016.079861

International Journal of Accounting, Auditing and Performance Evaluation, 2016 Vol.12 No.4, pp.333 - 359

Received: 21 Jan 2015
Accepted: 29 Sep 2015

Published online: 28 Sep 2016 *

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