The Effect of Language on Income Smoothing and on the Informativeness of Earnings: Cross-Country Evidence

Abstract

We examine whether and how the time-oriented tendency embedded in languages influences income smoothing. Separating languages into weak- versus strong-future time reference (FTR) groups, we find that firms in weak-FTR countries tend to smooth earnings more. We also find that when firms should value long-term relationships with stakeholders (i.e., debtholders, suppliers, customers, and employees) more, those in weak-FTR countries are more likely to smooth earnings. Finally, we find that the smoothed income driven by speakers of weak-FTR languages enhances the informativeness of corporate earnings. These findings provide new insights into how language influences income smoothing behavior, the use of smoothed income to maintain stakeholder relationships, and the informativeness of earnings.

Keywords: income smoothing; informativeness of earnings; languages; future time reference; time encoding

JEL Classification: M40, M41