A Theory of Income Smoothing When Insiders Know More than Outsiders

Forthcoming, Review of Financial Studies

54 Pages Posted: 16 Nov 2011 Last revised: 24 Mar 2015

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 5 versions of this paper

Date Written: March 10, 2015

Abstract

We develop a theory of income and payout smoothing by firms when insiders know more about income than outside shareholders, but property rights ensure that outsiders can enforce a fair payout. Insiders set payout to meet outsiders’ expectations and underproduce to manage future expectations downward. The observed income and payout process are smooth and adjust partially and over time in response to economic shocks. The smaller the inside ownership, the more severe underproduction is, resulting in an “outside equity Laffer curve”.

Keywords: payout policy, asymmetric information, under-investment, finance and growth

JEL Classification: G32, G35, M41, M42, O43, D82, D92

Suggested Citation

Acharya, Viral V. and Lambrecht, Bart M., A Theory of Income Smoothing When Insiders Know More than Outsiders (March 10, 2015). Forthcoming, Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=1959826 or http://dx.doi.org/10.2139/ssrn.1959826

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Bart Lambrecht (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44-(0)-1223-339700 (Phone)
44-(0)-1223-339701 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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