Why Do Firms Smooth Earnings?

Anand Moha Goel, A. V. Thakor

Research output: Contribution to journalArticlepeer-review

127 Scopus citations

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.

Original languageEnglish
Pages (from-to)151-192
Number of pages42
JournalJournal of Business
Volume76
Issue number1
DOIs
StatePublished - Jan 2003

Fingerprint

Dive into the research topics of 'Why Do Firms Smooth Earnings?'. Together they form a unique fingerprint.

Cite this