Analysis and Diagnosis of Income Smoothing in Spain

Abstract

This paper examines income smoothing behaviour for a sample of Spanish listed companies over the period 1991-1997. Discretionary accruals are used as a measure of managers' accounting discretion. Our results strongly support the income smoothing hypothesis which predicts aggressive (conservative) accounting policies when firm's current pre-managed performance undershoots (exceeds) target earnings, as proxied by median earnings for the firm's industry. Consistent with DeFond and Park (1997), we also provide some evidence supporting the anticipatory income smoothing hypothesis, whereby current period smoothing behaviour is partly conditioned on expected future performance.

Keywords: earnings management, income smoothing, discretionary accruals

JEL Classification: M41, M43, M47