How do the product and capital markets relate to segment disclosure?: Evidence from Japan

Purpose This paper aims to examine the relationship between the disclosure motivations derived from product and capital markets and segment information in Japanese firms. While the product market would motivate firms to adjust their disclosure to expected competitors’ reactions, the capital market would promote them to reduce information asymmetry through market discipline and corporate governance. Design/methodology/approach The segment data is manually collected from annual reports. Product market motivation is measured by the level of potential and existing competition. Capital market motivation is categorized into market discipline and corporate governance, primarily represented by foreign investors and stock-based compensation, respectively. After the cross-sectional baseline analysis, interaction terms between the two markets are added. Findings Product market motivation presents different effects on segment disclosure conditional on competition types. Notably, the level of potential competition is positively (negatively) linked with disclosure quality (quantity). Regarding capital market motivation, stock-based compensation negatively moderates the association between product market competition and voluntary disclosure quantity, suggesting that the compensation promotes hiding information when disclosure incurs higher proprietary costs. Originality/value This paper contributes to the literature in twofolds. First, the findings partially support the theoretical model suggesting the contrasting effects of the different types of competition on disclosure. This paper supplements Karuna (2023) with comprehensive disclosure variables. Nevertheless, the results are substantially specification-sensitive. Second, this paper examines an underexplored governance measure: stock-based compensation. The moderation analyses show novel evidence of its deterring effect on segment disclosure, complementing Enache and Kim (2020).