Role of Diversification in Earnings Management: An Evidence from Pakistan’s Emerging Markets
DOI:
https://doi.org/10.32350/aar.61.05Keywords:
accrual-earnings management, corporate diversification, geographic diversification, product diversification, real earnings managementAbstract
This study aimed to examine the nexus between corporate diversification and earnings manipulation. It considered how product and geographic diversifications (GDs) affect both types of earnings manipulations, such as accruals-based earnings manipulation and real-activities earnings manipulation in emerging markets. Agency theory, information asymmetry, and organizational complexity were utilized to explain the pivotal role of diversification in enhancing managerial discretion in financial reporting. The current study used panel data comprising 2,763 firm-year observations from non-financial firms that are listed on the Pakistan Stock Exchange (PSX). Fixed-effects regression analysis was employed to estimate the model. The results showed that both product and GD are positively related to earnings manipulation. The empirical evidence showed that diversified firms employ both accrual manipulation and real-activity manipulation, with GD having a more significant impact. The findings suggested that cross-border expansion is associated with greater organizational complexity and reporting opacity, which may reduce the effectiveness of monitoring mechanisms. This research added to the existing literature by incorporating all possible dimensions of diversification with both types of earnings manipulations in an emerging market. The empirical evidence also indicated that the complexities associated with diversification may be larger than its potential positive impacts on reporting quality. Therefore, these findings provided substantial implications for both investors and regulators. The policymakers should design additional mechanisms governing diversified firms to ensure higher levels of transparency in disclosures.
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Copyright (c) 2026 Qazi Muhammad Yasir Ayub, Shiraz Khan, and Shujahat Haider Hashmi
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