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Why Do Firms Smooth Earnings? Author info | Abstract | Publisher info | Download info | Related research | Statistics Anand Mohan Goel (University of Michigan)
Anjan V. Thakor (Olin School of Business, Washington University)
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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.
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Paper provided by EconWPA in its series Finance with number
0411021.
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Length: 42 pages
Date of creation: 10 Nov 2004Date of revision:
Handle: RePEc:wpa:wuwpfi:0411021Note: Type of Document - pdf; pages: 42Contact details of provider: Web page: http://129.3.20.41
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Find related papers by JEL classification: G - Financial Economics
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