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

See all articles by Jenny Wu Tucker

Jenny Wu Tucker

University of Florida - Warrington College of Business

Paul Zarowin

New York University (NYU) - Department of Accounting

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

Tucker, Jenny Wu and Zarowin, Paul, Does Income Smoothing Improve Earnings Informativeness? (July 1, 2005). The Accounting Review, 2016, Vol. 81 (1): 251-270 , Available at SSRN: https://ssrn.com/abstract=744708 or http://dx.doi.org/10.2139/ssrn.744708

Jenny Wu Tucker

University of Florida - Warrington College of Business ( email )

Gainesville, FL 32611
United States
352-273-0214 (Phone)
352-392-7962 (Fax)

Paul Zarowin (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
422 Tisch Hall
New York, NY 10012-1118
United States
212-998-0015 (Phone)
212-995-4004 (Fax)

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