Review of Accounting Studies, 4, 15–43 (1999) c  1999 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands. Measurement Errors and Information Content of Segment Reporting DAN GIVOLY Graduate School of Management, University of California, Irvine and the Israel Accounting Standards Board CARLA HAYN The Anderson School, University of California, Los Angeles JULIA D’SOUZA Johnson Graduate School of Management, Cornell University Abstract. This paper assesses the measurement errors inherent in segment reporting. Measurement errors are gauged by comparing the correlation of segment results with their industry to the corresponding correlation for single line-of-business firms operating in the same industry. The findings show that the measurement errors in segment information, particularly earnings, are larger than those in the financial information reported by single line-of-business firms. The cross-sectional variation in the measurement errors can be traced to cost/revenue allocations, management intervention in segment reporting, and the operational structure of multi-segment firms. Market tests indicate that the information content of segment information is inversely related to the estimated measurement errors. The introduction of mandatory line-of-business, or industry segment, disclosures by the Securities and Exchange Commission (SEC) in 1969 and the subsequent promulgation of Statement of Financial Accounting Standard (SFAS) No. 14 in 1976, which requires that the financial statements of a diversified business enterprise include information about the enterprise’s operations in different industries, were preceded by a heated debate. While most users of financial statements viewed this information as potentially beneficial, many felt that segment data, especially segment earnings, were likely to be so contaminated by measurement errors arising from segment identification, cost allocation, transfer pricing, and management manipulation that they would mislead investors. 1 The increased preva- lence of segment disclosure in recent years, 2 coupled with the various concerns about the quality of segment data, has led the Financial Accounting Standards Board (FASB) (as well as the American Institute of Certified Public Accountants (AICPA) and the International Accounting Standards Committee (IASC)) to once again address the issue of disaggregated reporting. 3 These discussions culminated in June 1997 with the issuance of SFAS No. 131 (1997), “Disclosures About Segments of an Enterprise and Related Information.” Past research suggests that the concerns about the quality of disaggregated data were, to some extent, justified. Kinney (1971), Collins (1976), and Silhan (1982), using different methodologies, find that while segment data improve the accuracy of firm-level sales fore- casts, segment earnings provide little incremental contribution beyond that already available from segment sales. Smith (1979) presents evidence that the predictive value of disaggre-