Income Smoothing and Idiosyncratic Volatility

46 Pages Posted: 15 Jan 2009 Last revised: 1 Feb 2018

See all articles by Garen Markarian

Garen Markarian

HEC - University of Lausanne

Belen Gill-de-Albornoz

Jaume I University - Department of Finance and Accounting

Date Written: February 1, 2012

Abstract

In this paper we empirically evaluate the widespread belief of managers that income smoothing results into lower stock market risk. Multivariate regressions confirm that a negative relation exists between discretionary income smoothing and idiosyncratic volatility. Further analysis indicates that smoothing is also related to analyst forecast patterns, institutional investors, share liquidity, and firm risk, all of which are independently related to volatility. Finally, we find that in cases where income smoothing appears to reduce information quality and/or otherwise lacks credibility as a signal of reduced equity risk, it is associated with higher stock return volatility, which suggests that in practice investor responses to income smoothing may be both more sophisticated and variable than previously realized.

Keywords: income smoothing, idiosyncratic volatility, volatility

JEL Classification: M41, M43, M47, G12, G34

Suggested Citation

Markarian, Garen and Gill de Albornoz Noguer, Belen, Income Smoothing and Idiosyncratic Volatility (February 1, 2012). AAA 2010 Financial Accounting and Reporting Section (FARS) Paper, Available at SSRN: https://ssrn.com/abstract=1270826 or http://dx.doi.org/10.2139/ssrn.1270826

Garen Markarian (Contact Author)

HEC - University of Lausanne ( email )

UNIL Dorigny
Lausanne, Lausanne 1015
Switzerland

Belen Gill de Albornoz Noguer

Jaume I University - Department of Finance and Accounting ( email )

Campus del Riu Sec
12081 Castello de la Plana
Spain

HOME PAGE: http://www.uji.es

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