Does Income Smoothing Make Stock Prices More Informative?
New York University Stern School of Business
40 Pages Posted: 25 Jun 2002
Date Written: June 2002
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: Suggested Citation