Using U.S. data over the period 1995-2010, we examine whether global diversification aggravates and mitigates information asymmetry associated with corporate earnings forecasts. Our results show that global diversification has a negative impact on the degree of information asymmetry as measured by analysts’ earnings forecast errors, dispersion of analysts’ earnings forecasts and the stock price response to earnings announcements. This finding suggests that the information diversification effect as documented by Thomas (2002) for industrial diversification is obtained for global diversification as well. However, our evidence runs counter to the prediction of Duru and Reeb (2002) that global diversification increases the complexity of forecasting tasks and thereby aggravates information asymmetry. Our results also suggest that the information diversification effect of global diversification is more pronounced for multi-segment firms than it is for single-segment firms.
Key words: corporate diversification, multinational corporations, analysts’ earnings forecasts, focus, asymmetric information, earnings management
