Does Income Smoothing Make Stock Prices More Informative?

New York University Stern School of Business

40 Pages Posted: 25 Jun 2002

See all articles by Paul Zarowin

Paul Zarowin

New York University (NYU) - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: June 2002

Abstract

This paper presents a new approach to studying the effects of earnings management, by testing whether income smoothing, a particular form of earnings management, is associated with more informative stock prices. Stock price informativeness is defined as the amount of information about future earnings and cash flows reflected in current period stock returns, and is measured as the coefficient on future earnings (cash flows) in a regression of current stock return against current and future earnings (cash flows and accruals). I find that firms with greater smoothing have more informative stock prices, implying that managers use income smoothing to reveal their private information about the firm's future profitability.

Keywords: income smoothing, stock price informativeness

JEL Classification: M4, G14

Suggested Citation

Zarowin, Paul, Does Income Smoothing Make Stock Prices More Informative? (June 2002). New York University Stern School of Business. Available at SSRN: https://ssrn.com/abstract=315099 or http://dx.doi.org/10.2139/ssrn.315099

Paul Zarowin (Contact Author)

New York University (NYU) - Department of Accounting ( email )

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