How does market value earnings smoothing under uncertainty?

Minhua Yang and Hui Zhu

Applied Financial Economics, 2014, vol. 24, issue 20, 1335-1345

Abstract: Evidence on whether smoothing earnings creates value remains inconclusive. This article examines the role of market uncertainty in the relationship between corporate earnings smoothing and stock returns. We find that firms with smoother earnings are viewed favourably by stockholders. However, taking into consideration the uncertainty factor, we find that market uncertainty has negative impact on the stock returns when managers smooth earnings. The results are robust to alternative measures of earnings smoothing and to subsample analyses. The results also provide supportive evidence on the importance of market uncertainty in information processing.

Date: 2014
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DOI: 10.1080/09603107.2014.925060

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