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An International Meeting of American Accounting
Association
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Earnings Quality and Excess Value of Diversification |
Sebahattin Demirkan
The University of Texas at Dallas
Suresh Radhakrishnan
The University of Texas at Dallas
Oktay Urcan
The University of Texas at Dallas
Abstract: We examine the association between diversification discount and earnings information quality. We find that the diversification discount is associated with earnings information quality as measured by abnormal accruals. Specifically we find that large positive abnormal accruals for single- (multiple-) segment firms are positively (not) associated with excess value. The large negative abnormal accruals are associated with excess value for both single- and multiple-segment firms in a similar fashion. Given that positive abnormal accruals are more likely to arise due to managerial opportunism, the results are consistent with investors demanding a higher premium for lower information quality in multiple-segment firms. We also find that the earnings response coefficient of multiple-segment firms is smaller than that of single-segment firms for similar changes in earnings. Our results also provide support for the signaling role of discretionary accruals for single-segment firms.