Accounting conservatism, corporate diversification and firm value

Abstract

This study investigates the impact of conservative financial reporting on corporate diversification, in order to explore whether accounting policy plays a role in mitigating agency problems associated with corporate decisions. Based on a sample of U.S. publicly listed firms in the period 2000–2017, this study initially reveals that diversification has an adverse effect on firm value. Our findings indicate that the increase in accounting conservatism leads to a subsequent reduction in the degree of corporate diversification. Additionally, the increase in accounting conservatism helps enhance the excess value attributed to diversification, suggesting that conservatism can alleviate the detrimental influence of diversification on firm value. Our results further indicate that the effect of accounting conservatism is more pronounced for firms with higher information asymmetry or poor corporate governance structure. Overall, the findings suggest that conservative accounting plays an effective monitoring role in disciplining management’s corporate strategies of diversification, and therefore, benefits shareholders and capital markets.