The Informational Role of Earnings Smoothing in Diversification

(Pages 300-311)

Hua Lee1,*, Hsien-Li Lee2 and Hung-Shu Fan3
1Department of Accounting, Hong Kong Shue Yan University, North Point, Hong Kong. 2Department of Accounting, Chung Yuan Christian University, Tao Yuan City, Taiwan. 3Department of Accounting, Fu Jen Catholic University, New Taipei City, Taiwan.


This paper examines whether managers smooth earnings to affect information asymmetry upon diversification. Using a sample of firms listed in Taiwan Stock Exchange, the results show that earnings smoothing increases the positive association between industrial diversification and bid-ask spread but reduces the negative association between global diversification and bid-ask spread. Our results are robust with respect to alternative research methodology (3SLS), alternative proxy for information asymmetry (analyst following), refined measure of earnings smoothing (i.e., discretionary earnings smoothing) after controlling for leverage, negative earnings, and return on equity. Collectively, the evidence suggests that discretionary earnings smoothing conveys managers’ favorable information for firms with global diversification, but garbles managers’ unfavorable information for firms with industrial diversification.


Global Diversification; Income Smoothing; Industrial Diversification; Organization Complexity.

JEL Classification:

G14, L25, M41

How to Cite:

Hua Lee, Hsien-Li Lee and Hung-Shu Fan. The Informational Role of Earnings Smoothing in Diversification. [ref]: vol.19.2021. available at:

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