Job Security and Income Smoothing: An Empirical Test of the Fudenberg and Tirole (1995) Model
43 Pages Posted: 15 Dec 2000 Last revised: 13 Jun 2011
Date Written: August 1, 2006
Fudenberg and Tirole (1995) analytically demonstrate that income smoothing can arise in equilibrium if managers are concerned about job security. Consistent with their model, DeFond and Park (1997) show that managers smooth income in consideration of both current and future relative performance. We provide more direct evidence on whether job security results in income smoothing. More specifically, we hypothesize that the extent of income smoothing will vary directly with managers' job security concerns (proxied by the degree of competition in firms' product markets, product durability, and capital intensity). Our results are consistent with our predictions and add to the literature on income smoothing.
Keywords: Income smoothing, Earnings management, Job security
JEL Classification: M41, M43, G34, J41
Suggested Citation: Suggested Citation