What Do Smoothed Earnings Tell Us About the Future?

Yusuke Takasu () and Makoto Nakano ()
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Yusuke Takasu: Hitotsubashi University
Makoto Nakano: Hitotsubashi University

A chapter in International Perspectives on Accounting and Corporate Behavior, 2014, pp 29-57 from Springer

Abstract: 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: Dividend policy; Earnings persistence; Income smoothing; Private information (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advchp:978-4-431-54792-1_2

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DOI: 10.1007/978-4-431-54792-1_2

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