Income Smoothing and the Cost of Debt

37 Pages Posted: 7 Jun 2010 Last revised: 21 Nov 2017

See all articles by Si Li

Si Li

Wilfrid Laurier University - School of Business & Economics

Nivine Richie

University of North Carolina Wilmington

Date Written: March 10, 2016

Abstract

Existing literature on income smoothing primarily focuses on the effect of earnings smoothing on the equity market. This paper investigates the effect of income smoothing on the debt market. Using the Tucker-Zarowin (TZ) statistic of income smoothing, we find that firms with higher income smoothing rankings exhibit lower cost of debt, suggesting that the information signaling effect of income smoothing dominates the garbling effect. We also find that the effect of earnings smoothing on debt cost reduction is stronger in firms with more opaque information and greater distress risk.

Keywords: Income smoothing, earnings smoothing, garbling, credit spreads, credit ratings, cost of debt

JEL Classification: G12, G32, M41

Suggested Citation

Li, Si and Richie, Nivine, Income Smoothing and the Cost of Debt (March 10, 2016). Available at SSRN: https://ssrn.com/abstract=1621760 or http://dx.doi.org/10.2139/ssrn.1621760

Si Li (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

Nivine Richie

University of North Carolina Wilmington ( email )

Wilmington, NC 28403
United States

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