Opacity of Opportunistic Income Smoothing: International Evidence

• In Event: Information Quality

Abstract

Opportunistic income smoothing should increase information opacity which in turns lead to higher future price crash risk. We contrast two popular income smoothing measures, one focuses on income smoothness as an earnings attribute by Francis, LaFond, Olsson and Schipper (FLOS, 2004) and one focuses on income smoothing resulted from earnings management (i.e. discretionary accruals) by Tucker and Zarowin (TZ, 2006). Studies often find that both of these measures predict similar phenomena. We argue the earnings management measure by TZ is more related to opportunistic behavior than the earnings attribute measure by FLOS; hence, should predict future crash risk more. Using financial data from 34 countries, we find that the earnings management measure suppresses the earnings attribute measure in explaining future crash risk, consistent with the suggestion that it is the opportunistic income smoothing that drives the results. Our subsample analyses based on investor protection also confirm this conclusion.
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Authors

• C.S. Agnes Cheng, The Hong Kong Polytechnic University

• Yue HU, The Hong Kong PolyTechnic University

• Shuo Li, The Hong Kong Polytechnic University

• YUXIANG Zhong, School of Management, Xi'an Jiaotong University