Does Income Smoothing Make Stock Prices More Informative?

40 Pages Posted: 9 Oct 2008

See all articles by Paul Zarowin

Paul Zarowin

New York University (NYU) - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: June 2002

Abstract

This paper presents a new approach to studying the effects of earnings management, by testing whether income smoothing, a particular form of earnings management, is associated with more informative stock prices. Stock price informativeness is defined as the amount of information about future earnings and cash flows reflected in current period stock returns, and ismeasured as the coefficient on future earnings (cash flows) in a regression of current stock return against current and future earnings (cash flows and accruals). I find that firms with greater smoothing have more informative stock prices, implying that managers use income smoothing to reveal their private information about the firm s future profitability.

Suggested Citation

Zarowin, Paul, Does Income Smoothing Make Stock Prices More Informative? (June 2002). NYU Working Paper No. PAUL ZAROWIN-03. Available at SSRN: https://ssrn.com/abstract=1281356

Paul Zarowin (Contact Author)

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

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