Is Earnings Management an Effective Tool to Reduce the Diversification Discount?

• Main Authors: Hsu, Ya-Han, 許雅涵
• Other Authors: Wang, Sue-Fung
• Format: Others
• Language: en_US
• Published: 2013
• Online Access: http://ndltd.ncl.edu.tw/handle/33549778293477977169

碩士 === 國立交通大學 === 財務金融研究所 === 101 === Previous literature focused on static diversification, which defined that multi-segment firms are corporate diversification. Nevertheless, this paper assumes that only dynamic segment-increasing firms can explain definitely the change in diversification strategy. Managers will window dress the firm’s value through earnings management to mislead investor that diversification does not result in the discount in the firm’s value. Results showed that transparency in financial report will actually lessen through earnings management. However, the market still effectively reveals the truth in diversification discount. Moreover, related and unrelated segment-increasing firms are distinguished by two-digit Standard Industrial Classification (SIC) codes. The loss in related segment-increasing firms is larger because they manipulate earnings management more seriously than unrelated segment-increasing firms do. Hence, we show that lesser transparency in financial reporting will cause larger discount in the firm’s value because of diversification.