Why Do Firms Smooth Earnings?

Anand Goel () and Anjan Thakor ()

Finance from University Library of Munich, Germany

Abstract: We explain why a firm may smooth reported earnings. Greater earnings volatility leads to a bigger informational advantage for informed investors over uninformed investors. If sufficiently many current shareholders are uninformed and may need to trade in the future for liquidity reasons, an increase in the volatility of reported earnings will magnify these shareholders' trading losses. They will, therefore, want the manager to smooth reported earnings as much as possible. Empirical implications are drawn out that link earnings smoothing to managerial compensation contracts, uncertainty about the volatility of earnings, and ownership structure.

JEL-codes: G (search for similar items in EconPapers)
Pages: 42 pages
Date: 2004-11-10
New Economics Papers: this item is included in nep-cfn and nep-fin
Note: Type of Document - pdf; pages: 42
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Journal Article: Why Do Firms Smooth Earnings? (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0411021

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