Corporate diversification, real activities manipulation, and firm value

• We examine corporate diversification, real earnings management, and firm value.
• Industrial diversification exacerbates real activities manipulation.
• Global diversification mitigates it.
• Real earnings management is inversely related to firm valuation.

We examine the relation between corporate diversification, real earnings management, and firm value. Our analysis indicates that industrial diversification and the combination of industrial and global diversification exacerbate real activities manipulation, whereas global diversification mitigates it. The evidence also shows that real earnings management is inversely related to firm valuation, and that it influences the excess value ascribed to diversification. We find that the reduction in value caused by real activities manipulation is more pronounced among industrially diversified firms and among firms that are both industrially and globally diversified, but not firms that are only globally diversified. Consequently, as the extent of real earnings management increases, the discount associated with industrial diversification becomes larger. These findings help to explain why some diversified firms have lower valuations not only across different diversification profiles, but also within the same diversification category. Our results also reconcile past literature by helping to explain discrepancies in previous findings. Therefore, our study provides a more unifying view of how the diversification discount can vary among firms and how it can change over time.