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What Do Smoothed Earnings Tell Us about the Future?

Author

Listed:
  • Yusuke Takasu

    (Graduate School of Commerce and Management, Hitotsubashi University, Japan)

  • Makoto Nakano

    (Graduate School of Commerce and Management, Hitotsubashi University, Japan)

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.

Suggested Citation

  • Yusuke Takasu & Makoto Nakano, 2012. "What Do Smoothed Earnings Tell Us about the Future?," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 2, pages 1-32, December.
  • Handle: RePEc:kob:tjrevi:dec2012:v:2:p:1-32
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    File URL: http://www.rieb.kobe-u.ac.jp/tjar/article/vol2/pdf/1.Takasu_and_Nakano.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. repec:dug:journl:y:2017:i:1:p:113-121 is not listed on IDEAS
    2. KOCHIYAMA, Takuma & SEKI, Koreyoshi, 2017. "Discretion in the Deferred Tax Valuation Allowance and Its Impact on Firms' Dividend Payouts," Working Paper Series 209, Management Innovation Research Center, Graduate School of Commerce and Management, Hitotsubashi University.
    3. repec:hur:ijaraf:v:7:y:2017:i:4:p:62-70 is not listed on IDEAS
    4. Jacek WELC, 2014. "Impact of Earnings Smoothness on Stock Prices, Stock Returns and Future Earnings Changes - the Polish Experience," European Financial and Accounting Journal, University of Economics, Prague, vol. 2014(3).

    More about this item

    Keywords

    Income Smoothing; Private Information; Earnings Persistence; Dividend Policy;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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