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

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