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Do industrial and geographic diversifications have different effects on earnings management? Evidence from UK mergers and acquisitions

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journal contribution
posted on 20.04.2016, 10:48 by Camelia Vasilescu, Yuval Millo
This paper examines whether corporate diversification has an impact on accruals earnings management by UK targets in M&As. Following prior research (Jiraporn, Kim, & Mathur, 2008; El Mehdi & Seboui, 2011), we explicitly distinguish between industrial and geographic diversification. These two dimensions of diversification differ in terms of their degree of information asymmetry, while in industrially diversified firms the accruals at the business segment level tend to offset each other, geographically diversified firms seem to be subject to higher information asymmetry. Using a sample of 229 UK publicly listed targets and employing cross-sectional accrual models and a panel regression framework, we find that industrial diversification mitigates earnings management by UK targets prior to M&As. The results of our study also show that a combination of industrial and geographic diversification is associated with a lesser degree of earnings management, which is consistent with those reported by Jiraporn, Kim, and Mathur (2008) and El Mehdi and Seboui (2011) for US firms. However, our evidence suggests that geographic diversification is associated with a higher degree of earnings management, however the results are not statistically significant.

History

Citation

International Review of Financial Analysis, 2016, 46, pp. 33-45

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/School of Management

Version

AM (Accepted Manuscript)

Published in

International Review of Financial Analysis

Publisher

Elsevier

issn

1057-5219

Acceptance date

10/04/2016

Copyright date

2016

Available date

27/03/2018

Publisher version

http://www.sciencedirect.com/science/article/pii/S1057521916300576

Language

en