Determinants of segment disclosure deficiencies and the effect of the SEC comment letter process

Segment reporting is one of the most common areas discussed in the SEC comment letters. Using a sample of hand-collected SEC comment letters, and companies’ response letters related to recent segment disclosure, this paper investigates determinants of segment disclosure deficiencies and the subsequent consequences after companies revised these deficiencies. The results show that segment disclosure deficiencies are positively associated with proxies for proprietary costs. Further analyses find that disclosure deficiencies related to aggregation of segments are more likely to be intentional, while other deficiencies are more likely due to business complexity. This paper also provides evidence on the effectiveness of the SEC comment letter process. Companies that revised the number of segments after receipt of SEC comment letters experienced decreased analysts’ forecast errors, reduced forecast optimistic bias and smaller forecast dispersions.