Does Income Smoothing Improve Earnings Informativeness?

37 Pages Posted: 9 Oct 2008

See all articles by X. Jenny Tucker

X. Jenny Tucker

affiliation not provided to SSRN

Paul Zarowin

New York University (NYU) - Department of Accounting

Date Written: June 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.

Suggested Citation

Tucker, X. Jenny and Zarowin, Paul, Does Income Smoothing Improve Earnings Informativeness? (June 2005). NYU Working Paper No. PAUL ZAROWIN-04. Available at SSRN: https://ssrn.com/abstract=1281357

X. Jenny Tucker (Contact Author)

affiliation not provided to SSRN

Paul Zarowin

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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