No. 233: Segment Disclosure Regulation, Proprietary Costs, and Organizational Restructuring

This study examines the response of firms with high proprietary costs to the segmental transparency requirements of SFAS 131, which mandates external reporting of internal divisions. We posit that firms with high proprietary costs react to the disclosure requirements by restructuring their organizational setup to withhold information from competitors. Analyzing a sample of 1,563 firms through a difference-indifferences approach, we observe a significant increase in net divisional manager hires among high proprietary cost firms after the mandate was announced, indicating the combination of internal divisions to reduce divisional transparency. Further analyses suggest that these changes in internal divisional structure are not attributable to general firm restructuring or growth. Furthermore, firms that restructured their internal divisional structure pre-SFAS 131 show decreased ex-post performance, suggesting net costs of the restructuring. Our findings highlight how proprietary costs can motivate firms’ organizational restructuring that diminishes the effectiveness of transparency regulations.