Does Corporate Diversification Exacerbate or Mitigate Earnings Management? An Empirical Analysis

43 Pages Posted: 3 Feb 2006

See all articles by Pornsit Jiraporn

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Ike Mathur

Southern Illinois University at Carbondale - Department of Finance

Date Written: February 4, 2006

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.

Keywords: Earnings management, Information asymmetry, Diversification

JEL Classification: G12, G14, G30, G32

Suggested Citation

Jiraporn, Pornsit and Kim, Young Sang and Mathur, Ike, Does Corporate Diversification Exacerbate or Mitigate Earnings Management? An Empirical Analysis (February 4, 2006). Available at SSRN: https://ssrn.com/abstract=879803 or http://dx.doi.org/10.2139/ssrn.879803

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Economics and Finance
Highland Heights, KY 41099
United States
859-572-5160 (Phone)
859-572-6627 (Fax)

Ike Mathur

Southern Illinois University at Carbondale - Department of Finance ( email )

Mailcode 4626
Carbondale, IL 62901-4626
United States
618-453-1421 (Phone)
618-453-5626 (Fax)

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