We investigate the association between corporate international diversification and the accuracy and bias of consensus analysts' earnings forecasts. We find that greater corporate international diversification is associated with less accurate and more optimistic forecasts. Our results suggest that international diversification reflects unique dimensions of forecasting difficulty that are not captured in previously identified determinants. This evidence suggests that as firms become more geographically diversified, forecasting their earnings becomes more complex.

ABSTRACT Prior literature finds that diversified firms sell at a discount relative to the sum of the imputed values of their business segments. We explore this documented discount and argue that it stems from risk‐reducing effects of corporate diversification. Consistent with this risk‐reduction hypothesis, we find that (a) shareholder losses in diversification are a function of firm leverage, (b) all equity firms do not exhibit a diversification discount, and (c) using book values of debt to compute excess value creates a downward bias for diversified firms. Overall, the results indicate that diversification is insignificantly related to excess firm value.