Title: Link between diversification strategies and earnings management: an empirical investigation of manufacturing firms

Authors: Ranjitha Ajay

Addresses: Great Lakes Institute of Management, Dr. Bala V. Balachandar Campus, East Coast Road, Manamai Village, TamilNadu, India

Abstract: This study investigates the relationship between diversification strategy and earnings management activities on a sample of 1,417 manufacturing firms listed in the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) for the period from 2004 to 2013. The final sample consists of 14,170 firm-year observations. We examine the applicability of two conflicting hypotheses: the agency cost hypothesis and the earnings volatility hypothesis to explore the impact of corporate diversification strategies namely international market diversification and product diversification on earnings management. We find that earnings management reduces as the extent of international diversification increases. Firms diversified across product segments are likely to have a higher level of real activities manipulation. Business affiliates with a higher degree of international market diversification have a lower level of discretionary accruals. The study provides useful insights to investors, analysts and regulators to make an informed decision on investments, forecasting earnings and policymaking respectively.

Keywords: accrual management; real activities management; diversification strategy; agency cost hypothesis; earnings volatility hypothesis.

DOI: 10.1504/AAJFA.2024.139927

Afro-Asian Journal of Finance and Accounting, 2024 Vol.14 No.4, pp.496 - 514

Received: 17 Jun 2021
Received in revised form: 30 Apr 2022
Accepted: 02 May 2022
Published online: 12 Jul 2024 *

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