Articlegreen2004

Income Smoothing, Earnings Quality and Firm Valuation

143 citations0/0 files storedJournal of Business Finance &amp Accounting

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Auditing, Earnings Management, Governance Financial Reporting and Valuation Research Corporate Governance and Financial Management

Abstract

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.

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1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 1996Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?1997Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?2000Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators 1988Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally 1997Smoothing income in anticipation of future earnings 1999Market Rewards Associated with Patterns of Increasing Earnings 1995A Theory of Income and Dividend Smoothing Based on Incumbency Rents

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