Heterogeneous Investment Opportunities in Multiple-Segment Firms and the Incremental Value Relevance of Segment Accounting Data

Applying an option-based valuation approach, we develop and test a model that addresses the incremental value relevance of segment data beyond firm-level accounting data. Prior studies (e.g., Zhang 2000; Biddle et al. 2001) show that firm value relates to accounting data (in part) because accounting data are useful for guiding capital investment decisions that underlie value creation. In this study, we establish that the incremental value relevance of segment data relates to the heterogeneity of investment decisions across segments, as informed by segmental profitability and investment opportunities. Equity value is predicted to depend not only on aggregate firm-level accounting data but also on the extent to which segments differ in profitability and investment opportunities. Our empirical tests confirm the predicted incremental effect of segment data