Why Do Firms Smooth Earnings?

Anand Goel () and Anjan V. Thakor ()

Finance from EconWPA

Abstract: We explain why a firm may smooth reported earnings. Greater earnings volatility leads to a bigger informational advantage for informed investors over uninformed investors. If sufficiently many current shareholders are uninformed and may need to trade in the future for liquidity reasons, an increase in the volatility of reported earnings will magnify these shareholders' trading losses. They will, therefore, want the manager to smooth reported earnings as much as possible. Empirical implications are drawn out that link earnings smoothing to managerial compensation contracts, uncertainty about the volatility of earnings, and ownership structure.

JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fin
Date: 2004-11-10
Note: Type of Document - pdf; pages: 42
View list of references View citations in EconPapers

Downloads: (external link)
http://129.3.20.41/eps/fin/papers/0411/0411021.pdf (application/pdf)

Related works:
Journal Article: Why Do Firms Smooth Earnings? (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0411021

Access Statistics for this paper

More papers in Finance from EconWPA
Series data maintained by EconWPA ().