Does Income Smoothing Improve Earnings Informativeness?
The Accounting Review, 2016, Vol. 81 (1): 251-270
38 Pages Posted: 17 Jun 2005 Last revised: 24 Mar 2019
Date Written: July 1, 2005
Abstract
This paper uses a new approach to examine whether income smoothing garbles earnings information or improves the informativeness of past and current earnings about future earnings and cash flows. We measure income smoothing by the negative correlation of a firm's change in discretionary accruals with its change in pre-managed earnings. Using the approach of Collins, Kothari, Shanken and Sloan (1994), we find that change in the current stock price of higher-smoothing firms contains more information about their future earnings than does change in the stock price of lower-smoothing firms. This result is robust to decomposing earnings into cash flows and accruals and to controlling for firm size, growth, future earnings variability, private information search activities, and cross-sectional correlations.
Keywords: Income smoothing, earnings management
JEL Classification: M41, M43, G12
Suggested Citation: Suggested Citation
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