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How does corporate diversification affect earnings management? A path analysis approach

Author

Listed:
  • El Mouttaqui, Hajar
  • Gleason, Kimberly
  • Jiraporn, Pornsit
  • Salama, Feras M.

Abstract

We examine whether and how corporate diversification affects earnings management. We find that diversified firms exhibit lower earnings management than comparable portfolios of single-segment firms and that the magnitude of reduction in earnings management increases with greater diversification. Using path analysis, we find that diversification decreases earnings management by reducing both earnings volatility and the need for external financing and by increasing the propensity to pay dividends. Our results are robust to using different measures of diversification and earnings management and continue to hold when we account for endogeneity using both the Heckman two-stage model and propensity score matching.

Suggested Citation

  • El Mouttaqui, Hajar & Gleason, Kimberly & Jiraporn, Pornsit & Salama, Feras M., 2024. "How does corporate diversification affect earnings management? A path analysis approach," International Review of Economics & Finance, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:reveco:v:95:y:2024:i:c:s1059056024004477
    DOI: 10.1016/j.iref.2024.103455
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    More about this item

    Keywords

    Corporate diversification; Earnings management; Internal capital markets; Path analysis;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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