Corporate Diversification And Earnings Management

Based on the needs of financing, this paper investigates the effect of corporate diversification, which contains investment diversification and operation diversification, on earnings management. Using a sample of 514 listed firms of Shanghai and Shenzhen Stock Exchanges from 2004 to 2006, we develop two multiple regression models to examine how investment diversification, operation diversification and related part transaction affect earnings management.The results show that from 2004 to 2006 listed firms have decreased the level of earnings management by the accruals but increased the level of earnings management by the below-the-line method. From the trend of diversification, diversification of operation has decreased while the level of diversification of investment has increased. In this paper, diversified investment and operation made a distinction and we find that a higher level of operation diversification inhibits the company's earnings management; higher investment levels of diversification promote the company's earnings management. Empirical evidence support the "Related Part Transactions hypothetical":A higher level of companies investment diversification, lead to more acts of the related part transactions, while the transactions is an important means of earnings management.