Smoothing, Big Baths, and Special Items

Posted: 30 Apr 1998

See all articles by Michael Kinney

Michael Kinney

Texas A&M University - Department of Accounting

Robert Trezevant

University of Southern California - Leventhal School of Accounting

Date Written: May 1996

Abstract

Using both large-sample tests and a detailed analysis of annual reports, we examine whether the recognition of income from special items is consistent with smoothing and/or big-bath behavior. Consistent with smoothing by firms with large earnings increases and big-bath behavior by firms with large earnings declines, we find that, relative to firms with small earnings changes, firms with large earnings changes on average recognize significantly negative income from special items. This recognition pattern appears to be driven by discretionary, rather than by semi-discretionary or nondiscretionary, items, and by items involving accounting choice rather than by items involving real economic events. Last, we find evidence that the placement of descriptions of special items in the financial statements is used to manage investors' perceptions. Specifically, this placement appears to be used to emphasize the transitory nature of income-decreasing special items and to avoid drawing attention to the transitory nature of income-increasing special items.

JEL Classification: M41, M45

Suggested Citation

Kinney, Michael R. and Trezevant, Robert, Smoothing, Big Baths, and Special Items (May 1996). Available at SSRN: https://ssrn.com/abstract=2635

Michael R. Kinney

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-862-2078 (Phone)
979-845-0028 (Fax)

Robert Trezevant (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5013 (Phone)
213-747-2815 (Fax)

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