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Income Smoothing, Earnings Quality and Firm Valuation

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  • Ben‐Hsien Bao
  • Da‐Hsien Bao

Abstract

This study argues that lower variability of earnings does not guarantee income smoothers’ higher firm values. Instead, smoothers’ earnings should be more value‐relevant if they are of high quality, i.e., earnings quality should be considered simultaneously. Sample firms are divided into four groups: quality earnings smoothers, quality earnings non‐smoothers, non‐quality earnings smoothers, and non‐quality earnings non‐smoothers. Value relevance of reported earnings is then studied using both the levels and the changes approaches with indicator variables. Results show quality earnings smoothers have the highest price‐earnings multiple while non‐quality non‐smoothers have the lowest price‐earnings multiple.

Suggested Citation

  • Ben‐Hsien Bao & Da‐Hsien Bao, 2004. "Income Smoothing, Earnings Quality and Firm Valuation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(9‐10), pages 1525-1557, November.
    • Handle: RePEc:bla:jbfnac:v:31:y:2004:i:9-10:p:1525-1557
    DOI: 10.1111/j.0306-686X.2004.00583.x
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    Cited by:

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    7. Ung, Lik-Jing & Brahmana, Rayenda & Puah, Chin Hong, 2014. "Earnings Management, Ownership Expropriation and Brokerage Fee of Malaysian Property Companies," MPRA Paper 63427, University Library of Munich, Germany.
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    11. Takashi Obinata & Kazuyuki Suda, 2006. "Value Relevance of the Multi-step Income Statement in Japan," CIRJE F-Series CIRJE-F-403, CIRJE, Faculty of Economics, University of Tokyo.
    12. Katsuo, Yuko, 2008. "Earnings quality, accruals and subjective goodwill accounting," LSE Research Online Documents on Economics 6912, London School of Economics and Political Science, LSE Library.
    13. Ung, Lik-Jing & Brahmana, Rayenda & Puah, Chin-Hong, 2014. "Does retrenchment strategy mitigate earnings management? Evidence from Public Listed Companies in Malaysia," MPRA Paper 63426, University Library of Munich, Germany.
    14. Arnedo, Laura & Lizarraga, Fermin & Sanchez, Santiago, 2007. "Does public/private status affect the level of earnings management in code-law contexts outside the United States? A study based on the Spanish case," The International Journal of Accounting, Elsevier, vol. 42(3), pages 305-328.
    15. Lee, Chien-Chiang & Wang, Chih-Wei & Wu, Yu-Ching, 2023. "CEO inside debt and downside risk: Evidence from internal and external environments," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    16. Cristhian Mellado-Cid & Surendranath R. Jory & Thanh N. Ngo, 2018. "Real activities manipulation and firm valuation," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1201-1226, May.
    17. Hasyyati Yusrina & Mukhtaruddin Mukhtaruddin & Luk Luk Fuadah & Zunaidah Sulong, 2017. "International Financial Reporting Standards Convergence and Quality of Accounting Information: Evidence from Indonesia," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 433-447.
    18. Joseph P.H. Fan & Feng Guan & Zengquan Li & Yong George Yang, 2014. "Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 831-866, September.
    19. Chung, Chune Young & Kim, Hye Seok & Liu, Chang, 2024. "Institutional monitoring on corporate earnings: Evidence from U.S. Cross-listed Firms," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    20. Jeong‐Bon Kim & Jeff J. Wang & Eliza Xia Zhang, 2021. "Does real earnings smoothing reduce investors’ perceived risk?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(9-10), pages 1560-1595, October.
    21. Phung Anh Thu & Nguyen Vinh Khuong, 2017. "Investigating income smoothing: Empirical evidence from Vietnam's listed companies," HO CHI MINH CITY OPEN UNIVERSITY JOURNAL OF SCIENCE - ECONOMICS AND BUSINESS ADMINISTRATION, HO CHI MINH CITY OPEN UNIVERSITY JOURNAL OF SCIENCE, HO CHI MINH CITY OPEN UNIVERSITY, vol. 7(2), pages 82-95.
    22. Yu, Kun & Hagigi, Moshe & Stewart, Scott D., 2018. "Income smoothing may result in increased perceived riskiness: Evidence from bid-ask spreads around loss announcements," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 442-459.

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