What Do Smoothed Earnings Tell Us about the Future?

Yusuke Takasu and Makoto Nakano
Additional contact information
Yusuke Takasu: Graduate School of Commerce and Management, Hitotsubashi University, Japan
Makoto Nakano: Graduate School of Commerce and Management, Hitotsubashi University, Japan

The Japanese Accounting Review, 2012, vol. 2, 1-32

Abstract: This study analyzes the information contents of income smoothing behavior, especially the role of income smoothing behavior as a signal of future performance. What do smoothed earnings tell us about the future? To answer this research question, this paper focuses on earnings persistence and dividend policy based on two prior survey papers. These two issues (earnings persistence and dividend policy) are the foci of this study, based on Japanese managers’ responses to questions regarding their motivation for income smoothing. This paper provides two new pieces of evidence. First, income smoothing in the previous period relates positively to future earnings persistence. Second, firms that engage in more smoothing tend to pay more stable dividends in the future, even when we control for past dividend policy, fundamental factors, and corporate governance factors. These results indicate that income smoothing behavior is likely to reflect future stability of earnings performance. Income smoothing acts as a vehicle through which managers can reveal private information about future earnings persistence and future dividend policy. The empirical evidence supports the information view rather than a garbling view of income smoothing, and sheds light on the bright side of smoothed earnings rather than its dark side.

Keywords: Income Smoothing; Private Information; Earnings Persistence; Dividend Policy (search for similar items in EconPapers)
JEL-codes: G14 G35 M41 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.rieb.kobe-u.ac.jp/tjar/article/vol2/pdf/1.Takasu_and_Nakano.pdf (application/pdf)

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:kob:tjrevi:dec2012:v:2:p:1-32

Access Statistics for this article

The Japanese Accounting Review is currently edited by Hidetoshi Yamaji

More articles in The Japanese Accounting Review from Research Institute for Economics & Business Administration, Kobe University Contact information at EDIRC.
Bibliographic data for series maintained by TJAR Editorial Office ().