Do Artificial Income Smoothing and Real Income Smoothing Contribute to Firm Value Equivalently?

Posted: 28 Dec 2009 Last revised: 31 Dec 2009

See all articles by Yan Zhang

Yan Zhang

State University of New York at Binghamton - School of Management

Pinghsun Huang

National Cheng Kung University

Donald R. Deis

Texas A&M University-Corpus Christi-Department of Accounting; Texas A&M University-Corpus Christi-College of Business

Jacquelyn Sue Moffitt

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Date Written: October 1, 2005

Abstract

This paper examines the potential impacts of artificial smoothing (abnormal accruals) and real smoothing (derivatives) on firm value. We find that the value of the firm decreases with the magnitude of abnormal accruals and increases with the level of derivative use. Moreover, the accrual discount is more pronounced in firms with weak investor protection and the hedging premium is greater for poorly governed firms. These results suggest that although managers can engage in real smoothing to improve the informativeness of firms’ earnings and thus reduce agency costs, they might use artificial techniques to cosmetically improve the income stream in order to expropriate minority shareholders. In further support of agency theories, we report that poor corporate governance motivates the use of abnormal accruals and discourages derivative use.

Keywords: Discretionary accruals, Derivative, Income smoothing, Corporate governance

JEL Classification: G12, G34, M41, M43, M44

Suggested Citation

Zhang, Yan and Huang, Pinghsun and Deis, Donald R. and Moffitt, Jacquelyn Sue, Do Artificial Income Smoothing and Real Income Smoothing Contribute to Firm Value Equivalently? (October 1, 2005). Journal of Banking and Finance, Vol. 33, No. 2, 2009. Available at SSRN: https://ssrn.com/abstract=844193

Yan Zhang (Contact Author)

State University of New York at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-6195 (Phone)
607-777-4422 (Fax)

Pinghsun Huang

National Cheng Kung University ( email )

1 Ta-Hsueh Road
Tainan, 701
Taiwan
+886 6 275 7575 ext 53441 (Phone)
+886 6 274 4104 (Fax)

Donald R. Deis

Texas A&M University-Corpus Christi-Department of Accounting ( email )

6300 Ocean Dr
Corpus Christi, TX 78412
United States
361-825-2826 (Phone)
361-825-5609 (Fax)

HOME PAGE: http://www.cob.tamucc.edu

Texas A&M University-Corpus Christi-College of Business

6300 Ocean Drive
Corpus Christi, TX 78412
United States

Jacquelyn Sue Moffitt

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

3101 CEBA Building
Baton Rouge, LA 70803-6308
United States
225-578-6219 (Phone)
225-578-6201 (Fax)

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