Does real earnings smoothing reduce investors’ perceived risk?

Jeong‐Bon Kim, Jeff J. Wang and Eliza Xia Zhang

Journal of Business Finance & Accounting, 2021, vol. 48, issue 9-10, 1560-1595

Abstract: This study examines whether real earnings smoothing influences equity and credit investors’ perceptions of risk. Using a large sample of US public firms, we find that real earnings smoothing is negatively associated with option‐implied volatility, suggesting that real earnings smoothing lowers equity investors’ perceived risk. We also find that real earnings smoothing is negatively associated with credit default swap spread, implying that real earnings smoothing lowers credit investors’ perceived risk. Our results are robust to multiple sensitivity analyses and to various tests used to address potential endogeneity. Moreover, the effect of real earnings smoothing is greater than that of accrual‐based smoothing, suggesting that real earnings smoothing is more difficult for investors to detect and unravel. Overall, our study documents a new factor that influences both equity and credit investors’ ex‐ante perceptions of risk.

Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1111/jbfa.12529

Related works:
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: https://EconPapers.repec.org/RePEc:bla:jbfnac:v:48:y:2021:i:9-10:p:1560-1595

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0306-686X

Access Statistics for this article

Journal of Business Finance & Accounting is currently edited by P. F. Pope, A. W. Stark and M. Walker

More articles in Journal of Business Finance & Accounting from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().