The impact of income smoothing on earnings quality in emerging markets

Abstract

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Corporate governance factors as predictors of earnings management

“…The present study found accruals-based measures to be better than the time-series measures, smoothness measures, however, outperformed accruals measures in predicting market returns. Unlike Shubita (2015), Dawar (2014) and Ganguli (2011) who found no significant impact of smoothing on market returns in India, the present study found significant negative hedge returns on portfolios based on smoothness measures which was 9% for EQ-3 and 15% for EQ-4 significant at 5% and 1%, respectively. Negative sign of the hedge returns suggests that earnings smoothing in India is opportunistic than informational.…”

Income smoothing and firm value in a regulated market: the moderating effect of market risk

“…This implies that smoothing carried out by Nigerian firms appears to be deliberate rather than natural, and investors priced firms' shares that engaged in smoothing, particularly intentional smoothing low. Also, smoothening income reduces the shock/ surprise in the market when the reported income by managers meets investors' forecasted income (Baik et al, 2019;Bartov et al, 2002;Chen et al, 2016;Lyimo, 2014;Oler et al, 2016;Shabani and Sofian, 2018;Shubita, 2015). This result is similar to the findings of Chen et al (2016); Novianti and Firmansyah (2020); Susanto andPradipta, 2019, andYu et al (2017) which revealed that investors perceive smoothing as an increase in risk and a means of managerial opportunism resulting in reduced firm value.…”

Earnings Smoothing as Information Signaling or Garbling: A Review of Literature

“…Although most studies generally use earnings smoothing as a proxy for earnings management (Bhattacharya et al, 2003;Burgstahler et al, 2006;Leuz et al, 2003), some studies find that earnings smoothing in fact is associated with improved earnings quality (Ewert & Wagenhofer, 2015;Shubita, 2015;Subramanyam, 1996;Tucker & Zarowin, 2006). Hence, it comes to no surprise when prior literatures reveal that the studies on the role of earnings smoothing are divided into two streams: as information signaling and information garbling.…”

“…Until recently, scholars have been trying to prove the existence of earnings smoothing activities (Beidleman, 1973;Boterenbrood, 2014;Khalil & Simon, 2014), figuring how (Atik, 2009;Francis et al, 2016) and when (Gassen et al, 2006;Gill de Albornoz & Alcarria, 2003) managers smooth earnings, characterizing earnings smoothing firms Bouwman, 2014;Z. Huang & Xue, 2016;Safdar & Yan, 2016;Silhan, 2014), and most importantly understanding the motivation (Goel & Thakor, 2003;Lambert, 1984;Trueman & Titman, 1988) and consequences (Houcine, 2017;Shubita, 2015;Tucker & Zarowin, 2006) of such behavior. This paper aims to review prior literatures, specifically on the role of earnings smoothing.…”