A Theory of Income Smoothing When Insiders Know More Than Outsiders

Viral Acharya and Bart M. Lambrecht

The Review of Financial Studies, 2015, vol. 28, issue 9, 2534-2574

Abstract: We develop a theory of income and payout smoothing by firms when insiders know more about income than outside shareholders, but property rights ensure that outsiders can enforce a fair payout. Insiders set payout to meet outsiders' expectations and underproduce to manage future expectations downward. The observed income and payout process are smooth and adjust partially and over time in response to economic shocks. The smaller the inside ownership, the more severe underproduction is, resulting in an "outside equity Laffer curve."

Date: 2015
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Working Paper: A Theory of Income Smoothing When Insiders Know More Than Outsiders (2012)
Working Paper: A Theory of Income Smoothing When Insiders Know More Than Outsiders (2011)
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