Accounting Implications of Corporate Diversification

Raphael Amit, Joshua Livnat and Paul Zarowin
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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

Management Science, 1991, vol. 37, issue 5, 532-545

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.

Keywords: corporate diversification; inflation-adjusted information; persistence of earnings; earnings response coefficients; selection of accounting methods (search for similar items in EconPapers)
Date: 1991
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