Does the Time-Oriented Tendency Embedded in Language Affect Corporate Income Smoothing? Cross-Country Evidence

46 Pages Posted: 11 Jan 2019

See all articles by Wenjiao Cao

Wenjiao Cao

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Zhifang Zhang

Essex Business School

Date Written: January 2019

Abstract

This paper studies the effect of the time-oriented tendency embedded in languages on corporate income smoothing behavior across 39 countries. Using a linguistic future time reference (FTR) that separates languages into weak- and strong-FTR, we find that firms in weak-FTR countries tend to smooth earnings more. We also find that the informational component (rather than the garbled component) of income smoothing is stronger for firms in weak-FTR countries, indicating that the higher degree of income smoothing behavior documented in weak-FTR countries enhances the informativeness of corporate earnings. These results are consistent with the ‘linguistically-induced bias in time perception’ mechanism of FTR, suggesting that language affects management’s future-related choices by changing how distant future events feel. Taken together, these findings advance our understanding of whether and how the FTR of language influences corporate financial reporting decisions.

Keywords: linguistic future time reference, income smoothing, earnings informativeness

JEL Classification: M40, M41

Suggested Citation

Cao, Wenjiao and Myers, Linda A. and Zhang, Zhifang, Does the Time-Oriented Tendency Embedded in Language Affect Corporate Income Smoothing? Cross-Country Evidence (January 2019). Available at SSRN: https://ssrn.com/abstract=3312686 or http://dx.doi.org/10.2139/ssrn.3312686

Wenjiao Cao

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Zhifang Zhang

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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