Smoothing income in anticipation of future earnings

Smoothing income in anticipation of future earnings Recent theory argues that concern about job security creates an incentive for managers to smooth earnings in consideration of both current and future relative performance. We find support for this theory. Our evidence suggests that when current earnings are ‘poor’ and expected future earnings are ‘good’, managers ‘borrow’ earnings from the future for use in the current period. Conversely, when current earnings are ‘good’ and expected future earnings are ‘poor’ managers ‘save’ current earnings for possible use in the future. However, sensitivity analysis indicates that we cannot rule out selection bias as a potential alternative explanation for our findings. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

Smoothing income in anticipation of future earnings

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Publisher
Elsevier
Copyright
Copyright © 1997 Elsevier Ltd
ISSN
0165-4101
D.O.I.
10.1016/S0165-4101(97)00004-9
Publisher site
See Article on Publisher Site

Abstract

Recent theory argues that concern about job security creates an incentive for managers to smooth earnings in consideration of both current and future relative performance. We find support for this theory. Our evidence suggests that when current earnings are ‘poor’ and expected future earnings are ‘good’, managers ‘borrow’ earnings from the future for use in the current period. Conversely, when current earnings are ‘good’ and expected future earnings are ‘poor’ managers ‘save’ current earnings for possible use in the future. However, sensitivity analysis indicates that we cannot rule out selection bias as a potential alternative explanation for our findings.

Journal

Journal of Accounting and EconomicsElsevier

Published: Jul 1, 1997

References

  • The effect of audit quality on earnings management
    Becker, C.; DeFond, M.; Jiambalvo, J.; Subramanyam, K.R.
  • Detecting earnings management
    Dechow, P.; Sloan, R.; Sweeney, A.
  • Additional evidence on bonus plans and income management
    Gaver, J.J.; Gaver, K.M.; Austin, J.R.
  • The pricing of discretionary accruals
    Subramanyam, K.R.

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