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http://ssrn.com/abstract=1959826
 
 

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A Theory of Income Smoothing When Insiders Know More than Outsiders


Viral V. Acharya


New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Bart M. Lambrecht


University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

September 3, 2014

European Corporate Governance Institute (ECGI) - Finance Working Paper No. 401/2014

Abstract:     
We develop a theory of income and payout smoothing by firms when insiders know more about income than outside shareholders, but property rights ensure that outsiders can enforce a fair payout. Insiders set payout to meet outsiders’ expectations and underproduce to manage downward future expectations. The observed income and payout process are smooth and adjust partially and over time in response to economic shocks. Underproduction is more severe the smaller is the inside ownership and results in an “outside equity Laffer curve”.

Number of Pages in PDF File: 58

Keywords: payout policy, asymmetric information, under-investment, finance and growth

JEL Classification: G32, G35, M41, M42, O43, D82, D92

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Date posted: November 16, 2011 ; Last revised: September 5, 2014

Suggested Citation

Acharya, Viral V. and Lambrecht, Bart M., A Theory of Income Smoothing When Insiders Know More than Outsiders (September 3, 2014). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 401/2014. Available at SSRN: http://ssrn.com/abstract=1959826 or http://dx.doi.org/10.2139/ssrn.1959826

Contact Information

Viral V. Acharya
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Bart Lambrecht (Contact Author)
University of Cambridge - Judge Business School ( email )
Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44-(0)-1223-339700 (Phone)
44-(0)-1223-339701 (Fax)
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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