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