Earnings Smoothing, Governance and Liquidity: International Evidence

40 Pages Posted: 26 Mar 2007

See all articles by Ryan LaFond

Ryan LaFond

Algert Global, LLC

Mark H. Lang

University of North Carolina at Chapel Hill

Hollis Ashbaugh Skaife

Graduate School of Management, UC-Davis

Date Written: March 2007

Abstract

We examine the relation between earnings smoothing, governance and liquidity for a sample of non-U.S. firms. We divide smoothing into innate and discretionary components, and find that discretionary smoothing is increasing in incentives to smooth (greater tax-book conformity, concentrated ownership, related party transactions and weak overall governance) and decreasing in oversight (investor protection, analyst following and ADR listing). Given the potential for smoothing to affect transparency, we examine the relation between smoothing and investors' willingness to transact in the stock as reflected in liquidity. After controlling for other liquidity determinants, we find that firms with greater levels of discretionary smoothing experience lower liquidity as evidenced by greater frequency of zero returns days, lower trading volume and higher bid-ask spreads. In contrast, results for innate smoothing suggest that innate smoothing is positively correlated with liquidity. Taken together, our results suggest that investors differentiate between innate and discretionary smoothing, and discretionary smoothing reduces their willingness to transact in the stock.

Keywords: earnings smoothing, earnings management, liquidity, accounting quality, governance

JEL Classification: G15, G32, M41, M43, M47

Suggested Citation

LaFond, Ryan and Lang, Mark H. and Skaife, Hollis Ashbaugh, Earnings Smoothing, Governance and Liquidity: International Evidence (March 2007). Available at SSRN: https://ssrn.com/abstract=975232 or http://dx.doi.org/10.2139/ssrn.975232

Ryan LaFond (Contact Author)

Algert Global, LLC ( email )

One Maritime Plaza
Suite 1525
San Francisco, CA 94111
United States

Mark H. Lang

University of North Carolina at Chapel Hill ( email )

Kenan-Flagler Business School
McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-1644 (Phone)
919-962-4727 (Fax)

Hollis Ashbaugh Skaife

Graduate School of Management, UC-Davis ( email )

Graduate School of Management
1 Shields Ave
Davis, CA 95616
United States

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