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Accounting Implications of Corporate Diversification

Author

Listed:
  • Raphael Amit

    (Faculty of Commerce and Business Administration, University of British Columbia, 2053 Main Mall, Vancouver, British Columbia, Canada V6T 1Y8)

  • Joshua Livnat

    (Graduate School of Business Administration, New York University, 90 Trinity Place, New York, New York 10006)

  • Paul Zarowin

    (Graduate School of Business Administration, New York University, 90 Trinity Place, New York, New York 10006)

Abstract

This study investigates the direct effects of corporate diversification on accounting reports, and the implications of these effects for accounting research. The study shows that firms which diversify into unrelated areas of business devote a larger proportion of their capital investments to acquisitions and are, therefore, characterized by smaller differences between replacement-cost and historical-cost values of assets than undiversified firms. The implications of these findings, as well as other operating characteristics of diversified firms, for the following areas of accounting research are subsequently examined. (1) Inflation-adjusted data. Inflation-adjusted data of diversified firms have less incremental information content (beyond historical-cost) than those of undiversified firms. (2) Earnings Response Coefficients. Diversified firms have stronger market associations with earnings changes, and their earnings are more persistent. (3) Selection of accounting methods. Diversified firms select, ceteris paribus, more liberal accounting methods than their undiversified counterparts.

Suggested Citation

  • Raphael Amit & Joshua Livnat & Paul Zarowin, 1991. "Accounting Implications of Corporate Diversification," Management Science, INFORMS, vol. 37(5), pages 532-545, May.
    • Handle: RePEc:inm:ormnsc:v:37:y:1991:i:5:p:532-545
    DOI: 10.1287/mnsc.37.5.532
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    Cited by:

    1. Ahmed , Abubakar & Sani Mahmud, Madobi, 2020. "Organisational Complexity And Earnings Management Of Listed Manufacturing Firms In Nigeria: Does Industry-Specialised Auditor Matter?," International Journal of Contemporary Accounting Issues-IJCAI (formerly International Journal of Accounting & Finance IJAF), The Institute of Chartered Accountants of Nigeria (ICAN), vol. 9(2), pages 85-103, September.

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