The Effect of Language on Income Smoothing: Cross-Country Evidence

56 Pages Posted: 11 Jan 2019 Last revised: 27 Feb 2023

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

Warwick Business School

Date Written: February 2023

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 relationships with major stakeholders (i.e., debtholders, suppliers, and employees) amplify the effect of the FTR of languages on income smoothing. Additional analyses suggest that income smoothing driven by the FTR of languages enhances earnings informativeness. These findings provide new insights on the role that language plays in financial reporting decisions and on how relationships with major stakeholders influence the relation between an important feature of language and corporate income smoothing behavior.

Keywords: language; future time reference; income smoothing; stakeholder relationships; informativeness of earnings

JEL Classification: M40, M41

Suggested Citation

Cao, Wenjiao and Myers, Linda A. and Zhang, Zhifang, The Effect of Language on Income Smoothing: Cross-Country Evidence (February 2023). 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

Warwick Business School ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom

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