Firm Diversification and Earnings Management: Evidence from Seasoned Equity Offerings
Popular press suggests that diversified firms are more aggressive in managing earnings than non-diversified firms. We examine this claim in the seasoned equity offering (SEO) setting, where firms have been shown to have the incentive to manage earnings upwards. Using the cross-sectional modified Jones [(1991) J Accounting Res 29:193–228] model to measure discretionary current accruals, we find that discretionary current accruals are higher among diversified firms than in non-diversified ones. Our evidence is consistent with the view that the extent of firm diversification is directly related to the degree of earnings management. We further show that diversified issuers with high discretionary accruals underperformed other SEO firms.
Finance and Financial Management | Portfolio and Security Analysis
Review of Quantitative Finance and Accounting
THONG, Tiong Yang; Ding, David K.; and LIM, Chee Yeow.
Firm Diversification and Earnings Management: Evidence from Seasoned Equity Offerings. (2008). Review of Quantitative Finance and Accounting. 30, (1), 69-92. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/1143