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

55 Pages Posted: 11 Jan 2019 Last revised: 26 May 2021

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: January 1, 2019

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

Suggested Citation

Cao, Wenjiao and Myers, Linda A. and Zhang, Zhifang, The Effect of Language on Income Smoothing and on the Informativeness of Earnings: Cross-Country Evidence (January 1, 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

Warwick Business School ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom

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