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Managerial Empire Building and Firm Disclosure


  • We are very grateful for valuable comments from an anonymous referee, Merle Erickson (editor), Linda Bamber, Phil Berger, Rob Bloomfield, Øyvind Bøhren, Jeff Callen, Jere Francis, Ross Jennings, Roger Martin, Lil Mills, Lukasz Pomorski, Florin Vasvari, Ram Venkataraman, Rodrigo Verdi, Dushyant Vyas, and workshop participants at Cornell University, Hong Kong Polytechnic University, Norwegian School of Economics and Business Administration, Southern Methodist University, University of Connecticut, University of Cyprus, University of Kansas, University of Missouri, University of Southern California, University of Tennessee, University of Texas at Austin, University of Texas at El Paso, the midyear meeting of the American Accounting Association (International Section), Concordia Research Camp, the European Accounting Association Annual Meeting (Lisbon), the Canadian Academic Accounting Association Annual Meeting (Halifax), the European Financial Management Association Annual Meeting (Vienna), the American Accounting Association Annual Meeting (Chicago), the First Toronto Accounting Research Conference at the Rotman School of Management, and the Financial Management Association Annual Meeting (Orlando). We also thank Yan Sun for research assistance. Hope gratefully acknowledges the financial support of the Deloitte Professorship and the Social Sciences and Humanities Research Council of Canada.


This study tests the agency cost hypothesis in the context of geographic earnings disclosures. The agency cost hypothesis predicts that managers, when not monitored by shareholders, make self-maximizing decisions that may not necessarily be in the best interest of shareholders. These decisions include aggressively growing the firm, which reduces profitability and destroys firm value. Geographic earnings disclosures provide an interesting context to examine this issue. Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), most U.S. multinational firms are no longer required to disclose earnings by geographic area (e.g., net income in Mexico or net income in East Asia). Such nondisclosure potentially reduces the ability of shareholders to monitor managers' decisions related to foreign operations. Using a sample of U.S. multinationals with substantial foreign operations, we find that nondisclosing firms, relative to firms that continue to disclose geographic earnings, experience greater expansion of foreign sales, produce lower foreign profit margins, and have lower firm value in the post–SFAS 131 period. Our conclusions are strengthened by the fact that these differences do not exist in the pre–SFAS 131 period and do not relate to domestic operations. We find differences in the predicted direction only for foreign operations and only after adoption of SFAS 131. Our results are robust to the inclusion of an extensive set of control variables related to alternative corporate governance mechanisms, operating performance, and the firm's information environment. Overall, the results are consistent with the agency cost hypothesis and the important role of financial disclosures in monitoring managers.

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