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Extraordinary Items And Income Smoothing: A Positive Accounting Approach

Author

Listed:
  • Vivien Beattie
  • Stephen Brown
  • David Ewers
  • Brian John
  • Stuart Manson
  • Dylan Thomas
  • Michael Turner

Abstract

This is an empirical study of single‐period income smoothing which uses an incentives‐based model to explain classificatory choices. An index is constructed to measure the smoothing effect of these choices. Weighted least squares regression results indicate that classificatory choices consistent with smoothing are more likely to be observed in firms with high earnings variability, high dividend payout, substantial managerial holdings of share options and diffuse share ownership. The existence of material scope for smoothing strengthens these findings. The model as a whole is statistically significant and, although the proportion of variability in smoothing explained is modest, it compares very favourably with other accounting choice studies. The relationship between smoothing and alternative earnings management strategies, including big bath accounting, is explored.

Suggested Citation

  • Vivien Beattie & Stephen Brown & David Ewers & Brian John & Stuart Manson & Dylan Thomas & Michael Turner, 1994. "Extraordinary Items And Income Smoothing: A Positive Accounting Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 21(6), pages 791-811, September.
    • Handle: RePEc:bla:jbfnac:v:21:y:1994:i:6:p:791-811
    DOI: 10.1111/j.1468-5957.1994.tb00349.x
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