Accounting implications of corporate diversification

Accounting implications of corporate diversification

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Article ID: iaor199223
Country: United States
Volume: 37
Issue: 5
Start Page Number: 532
End Page Number: 545
Publication Date: May 1991
Journal: Management Science
Authors: , ,
Keywords: investment, relationships with other disciplines
Abstract:

This study investigates the direct effects of corporate diversification on accounting reports, and the implications of these effects for accounting research. The study shows that firms which diversify into unrelated areas of business devote a larger proportion of their capital investments to acquisitions and are, therefore, characterized by smaller differences between replacement-cost and historical-cost values of assets than undiversified firms. The implications of these findings, as well as other operating characteristics of diversified firms, for the following areas of accounting research are subsequently examined. (1)Inflation-adjusted data. Inflation-adjusted data of diversified firms have less incremental information content (beyond historical-cost) than those of undiversified firms. (2)Earnings Response Coefficients. Diversified firms have stronger market associations with earnings changes, and their earnings are more persistent. (3)Selection of accounting methods. Diversified firms select, ceteris paribus, more liberal accounting methods than their undiversified counterparts.

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