The Effect of Language on Income Smoothing: Cross-Country Evidence
56 Pages Posted: 11 Jan 2019 Last revised: 27 Feb 2023
Date Written: February 2023
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: Suggested Citation