Managerial empire building and segment reporting quality: The role of auditor industry specialization

Abstract

This study aims to explore whether empire building firms have lower segment reporting quality under the new accounting standard-IFRS No. 8, Operating Segments. IFRS No. 8 requires firms to report segment information on basis of the management approach, which implying the opportunity of managerial manipulation. We use the sample of 8 countries that have followed IFRS 8 over the period 2009-2011, and find that when managers with high incentives to build managerial empire will conceal segment reporting information on purpose which leads to lower segment reporting quality. Furthermore, our results show that external auditors with industrial experience attenuate the agency problem of managerial empire building and consequently increase segment reporting quality.