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http://ssrn.com/abstract=1621760
 
 

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Income Smoothing and the Cost of Debt


Si Li


Wilfrid Laurier University - School of Business & Economics

Nivine Richie


University of North Carolina Wilmington

January 2009


Abstract:     
Using the Tucker-Zarowin (TZ) statistic of income smoothing, we find firms with higher income smoothing rankings exhibit lower cost of debt and higher credit ratings. Multivariate analysis reveals that firms with higher financial leverage and lower credit ratings experience are associated with higher borrowing costs, but that such borrowing costs can be reduced by smoothing reported income. Furthermore, larger firms and firms with greater stock return volatility and who exhibit higher income smoothing rankings experience relative higher borrowing costs. Results support the notion that for smaller firms with lower stock return volatility, income smoothing represents information signaling rather than garbling.

Number of Pages in PDF File: 28

Keywords: Income smoothing, earnings smoothing, garbling, credit spreads, credit ratings, cost of debt

JEL Classification: G12, G32, M41

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Date posted: June 7, 2010  

Suggested Citation

Li, Si and Richie, Nivine, Income Smoothing and the Cost of Debt (January 2009). Available at SSRN: http://ssrn.com/abstract=1621760 or http://dx.doi.org/10.2139/ssrn.1621760

Contact Information

Si Li (Contact Author)
Wilfrid Laurier University - School of Business & Economics ( email )
Waterloo, Ontario N2L 3C5
Canada
Nivine Richie
University of North Carolina Wilmington ( email )
Wilmington, NC 28403
United States
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