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

Hajar El Mouttaqui, Kimberly Gleason, Pornsit Jiraporn and Feras M. Salama

International Review of Economics & Finance, 2024, vol. 95, issue C

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.

Keywords: Corporate diversification; Earnings management; Internal capital markets; Path analysis (search for similar items in EconPapers)
JEL-codes: D22 L25 M40 M41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:95:y:2024:i:c:s1059056024004477

DOI: 10.1016/j.iref.2024.103455

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