Firm diversification and earnings management strategies: European evidence

Jenny Berrill, Domenico Campa and Martha O'Hagan-Luff

International Review of Financial Analysis, 2021, vol. 78, issue C

Abstract: This paper investigates whether corporate diversification, both international and industrial, provides a favourable environment for earnings management. We find that international diversification is associated with greater manipulation of accruals and sales but with lower manipulation of production costs. Industrial diversification is associated with lower levels of all three earnings management strategies. We find strong evidence that the combination of industrial and international diversification increases real activity manipulation but has no effect on accrual manipulation. Moreover, we find that in the presence of firm complexity linked to higher levels of earnings management, the recommendations of financial analysts are more likely to be on the sell side and vice versa. Our results provide useful insights to investors by highlighting the impact of corporate diversification on earnings management and, thus, the accurate estimation of firm value.

Keywords: International diversification; Industrial diversification; Accrual manipulation; Real activity manipulation; Earnings management (search for similar items in EconPapers)
JEL-codes: C33 F23 L25 M41 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521921002751
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:78:y:2021:i:c:s1057521921002751

DOI: 10.1016/j.irfa.2021.101955

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().