Accounting conservatism, corporate diversification and firm value

Chloe Yu-Hsuan Wu (), Shou-Min Tsao () and Che-Hung Lin ()
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Chloe Yu-Hsuan Wu: University of Leeds
Shou-Min Tsao: National Central University
Che-Hung Lin: National Pingtung University

Review of Quantitative Finance and Accounting, 2025, vol. 64, issue 1, No 11, 415 pages

Abstract: Abstract This study investigates the impact of conservative financial reporting on corporate diversification, in order to explore whether accounting policy plays a role in mitigating agency problems associated with corporate decisions. Based on a sample of U.S. publicly listed firms in the period 2000–2017, this study initially reveals that diversification has an adverse effect on firm value. Our findings indicate that the increase in accounting conservatism leads to a subsequent reduction in the degree of corporate diversification. Additionally, the increase in accounting conservatism helps enhance the excess value attributed to diversification, suggesting that conservatism can alleviate the detrimental influence of diversification on firm value. Our results further indicate that the effect of accounting conservatism is more pronounced for firms with higher information asymmetry or poor corporate governance structure. Overall, the findings suggest that conservative accounting plays an effective monitoring role in disciplining management’s corporate strategies of diversification, and therefore, benefits shareholders and capital markets.

Keywords: Accounting conservatism; Corporate diversification; Firm value; Agency cost; Information asymmetry (search for similar items in EconPapers)
JEL-codes: G34 M14 M41 O16 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11156-024-01308-x

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