Does corporate diversification exacerbate or mitigate earnings management? An empirical analysis

Pornsit Jiraporn, Young Sang Kim, Ike Mathur

Research output: Contribution to journalArticlepeer-review

34 Scopus citations

Abstract

The purpose of this study is to determine whether earning management is exacerbated or alleviated in diversified firms. An explicit distinction is made between industrial and geographic diversification. The empirical evidence shows that earnings management is mitigated by 1.8% in industrially diversified firms. The evidence also shows that a combination of industrial and global diversification helps alleviate earnings management by 2.5%. Global diversification alone, however, does not appear to impact earnings management. We argue that diversified firms derive their cash flows from disparate business divisions. The accruals generated by these business divisions are imperfectly correlated and, hence, tend to offset each other at the entire firm's level, making it difficult for managers to manage earnings considerably in either direction. Finally, our results show that diversified firms do not suffer more severe informational asymmetry, which may explain why earnings management does not occur to a greater extent in diversified firms.

Original languageEnglish (US)
Pages (from-to)1087-1109
Number of pages23
JournalInternational Review of Financial Analysis
Volume17
Issue number5
DOIs
StatePublished - Dec 2008

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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