the incremental value relevance of geographic segment disclosures: canadian evidence roger graham,...
TRANSCRIPT
![Page 1: The Incremental Value Relevance of Geographic Segment Disclosures: Canadian Evidence Roger Graham, Oregon State University Cameron Morrill, University](https://reader036.vdocuments.us/reader036/viewer/2022072006/56649d1f5503460f949f383b/html5/thumbnails/1.jpg)
The Incremental Value Relevance of Geographic
Segment Disclosures: Canadian Evidence
Roger Graham, Oregon State University
Cameron Morrill, University of Manitoba
Janet Morrill, University of Manitoba
May 2005
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Presentation Agenda
1. Introduction
2. Literatureo Segmented Disclosureso Quebec environment and Political Risk
3. Research model
4. Data and Results
5. Conclusions
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Segmented Disclosures
• Objective of segmented disclosures is to help users:– Better understand the enterprise’s performance– Better assess future cash flows– Make more informed judgments about the
enterprise as a whole
• “reportable segments” can be either geographic or by line of business
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Changes to Canadian Section 1701(similar to SFAS 131)
• Reporting consistent with internal reporting
• Less information by geographic segment
• Geographic segment required for country of domicile and foreign countries combined, and on a country-by- country basis if material
• Is information by geographic segment important?
• Can there be important information at a level other than by country?
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Usefulness of geographic segment disclosure (old rules)
• Weak evidence of market reaction to unexpected profits by geographic segmentBoatsman et al, 1993
• Over long windows, link between security returns and geographic segment earnings differs by segmentThomas, 2000
• No evidence of geographic usefulness under new rules
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Usefulness of LOB disclosure
• Survey respondents perceive segmented information usefulBaldwin, 1984; Berger et al, 2003; Lobo et al 1998
• Link between market values and financial information is stronger when using segmented information instead of aggregated informationTse, 1989; Givoly et al, 1999
• Incremental content of l.o.b. is small but significant. Significance increases with differential profit and growth opportunitiesChen and Zhang, 2003
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Our approach
To test whether information on extent of operations in Quebec (from a non-financial-statement source) is value relevant
Implications:1. Market is efficient with respect to other public
information2. Geographic segment information is value
relevant3. Information at a sub-national level can be
relevant.
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Quebec’s Business Environment
• Political Uncertainty– Possibility of secession– Possible negative consequences
• Bill 101
• Quebec Civil Code
• Restrictions on Corporate Takeovers
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Potential economic consequences of Quebec sovereignty: The market’s assessment
• Firms moving out of Quebec earn positive abnormal returns (Tirtiroglu, Bhabra and Lel, 2004)
• Quebec-headquartered firms trade at a discount (Graham, Morrill and Morrill, 2005)
• Quebec provincial bond yields increase as support for Quebec sovereignty increases (Johnson and McIlwraith, 1998)
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Market – book model (GMM 2005)Basic model: MVEit+2 = ß1BVEit + ß2Eit + eit
MVEit+2 = t + t*Qit + ß1BVEit + ß2Q*BVE
+ ß3Eit + ß4Q*Eit + eit
MVE = market value of equity
Q = 1 for Quebec firm; 0 for non-Quebec
BVE = book value of equity
E = earnings from continuing operations = controls for size, growth, leverage,year
Results: ß1, ß3 > 0; ß2, ß4< 0
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Our market – book modelMVEit+2 = t + t*Qit + ß1BVEit + ß2Q*BVE + ß3Eit
+ ß4Q*Eit + ß5PCTit + ß6Q*PCTit
+ ß7PCTit*BVEit + ß8PCTit*Eit + eit
MVE = market value of equity
Q = 1 for Quebec firm; 0 for non-Quebec
BVE = book value of equity
E = earnings from continuing operations
PCT = extent of firm operations in Quebec
= controls for size, growth, leverage,year
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Data• Firms with accounting and market data
available in Compustat TSE data file
• Firms with Quebec segment information (employees, sales, assets) in Les Affaires
• Deleted firms with– Insufficient data– Negative book values– Extreme values (top and bottom 2%) of
earnings and sales growth
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Descriptive statistics(* = QC vs. non-QC different, p<.05)
QC firms (82) Non-QC firms (51)
N Mean N Mean
QC employees* 590 54.5% 418 27.2%
QC sales* 211 58.3% 156 35.2%
QC assets* 250 67.4% 135 28.0%
EPS 590 $0.80 418 $0.77
BV per share 590 $9.17 418 $10.27
MV per share* 588 $11.64 417 $16.73
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Market Value Regression ResultsBVE = book value of equity; E = earnings; Q = Quebec
dummy; PCT = % employees in QC.*(**) significant at p < 0.05 (p<0.01)
Ind. variable Exp. Model 1 Model 2 Model 3
BVE + 1.44** 1.30** 1.50**
E + 2.02** 1.75** 1.66**
Q*BVE - -0.20* 0.07
Q*E - -0.06 -1.05**
PCT*BVE - -0.36* -0.99**
PCT*E - 0.95* 3.16**
Adj. R2 0.85 0.85 0.86
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Tests of incremental explanatory power
Effect of adding: F(df numerator, df denominator)
[probability]
PCT variables to location-only model
F(6,907) = 4.58 [ p<0.001 ]
Location variables to PCT-only model
F(5,907) = 7.77 [ p<0.001 ]
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Conclusion• Firms located in Quebec have lower market
multiples on book value an earnings leading to lower firm values (we knew that already)
• Segment disclosure, even voluntarily disclosed and unaudited, seems to be value-relevant in addition to location of firm headquarters
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Disclosure ImplicationsExpanded geographical disclosures could
provide relevant information• Bringing geographic information into realm
of financial statements allows it to be subjected to audit
• Re-visit decision to provide geographic information by country only– Allowing discretion or specifying conditions
could increase relevance– Danger is threat to reliability from “strategic
aggregation or disaggregation”
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Paper is available at:http://www.umanitoba.ca/asper/faculty/cam.morrill/