Earnings' Quality and Smoothing

Kirschenheiter, Michael; Melumad, Nahum D.

doi:10.2139/ssrn.930445

Cited by 32 publications

(21 citation statements)

References 14 publications

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“…The authors decompose earnings volatility into cash and accrual components, and find results suggesting that investors value earnings that have been smoothed via the cash components as opposed to the accrual component of earnings. 5 Although earnings smoothing is generally expected to garble the information content of current period earnings (e.g., Leuz, Nanda and Wysocki, 2003;Jayaraman, 2008), there are several theoretical explanations as to how it could improve the overall quality of earnings information (e.g., Demski, 1998;Sankar and Subramanyam, 2001;Arya, Glover and Sunder, 2003;Kirschenheiter and Melumad, 2007). For example, Arya, Glover and Sunder (2003) argue that by smoothing earnings, managers remove the transient portion of earnings and communicate the sustainable portion, thereby enabling investors to form an efficient estimate of firm value.…”

Section: Literature Reviewmentioning

confidence: 99%

“…In contrast to the managerial opportunism view of earnings smoothing, researchers have also viewed earnings smoothing as shareholder value maximizing. A large body of prior studies has shown various benefits of smooth earnings streams, such as signaling superior performance (Ronen and Sadan, 1981; Chaney and Lewis, 1995), higher quality of earnings (Kirschenheiter and Melumad, 2007), and lowering risk perceptions of investors and debt holders (Trueman and Titman, 1988). A survey of chief financial officers (CFO) supports the findings of these studies.…”

Section: Introductionmentioning

confidence: 99%

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Earnings Smoothing, Cash Flow Volatility, and CEO Cash Bonus

Das

Hong

Kim

2013

The Financial Review

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Prior studies generally relate managers’ decisions to smooth earnings to their desire to maximize their overall compensation and to smooth their consumption. However, earnings smoothing could also be driven by the firm's expected benefits from reporting a smooth earnings stream. Our paper provides empirical support for the latter explanation of earnings smoothing. Specifically, we find that while CEO bonus on average increases with earnings smoothing, the increase is larger when the firm's cash flow volatility is higher. Further, CEO bonus is shielded from the negative effects of lower earnings arising from the need to report a smoother earnings stream.

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Section: Literature Reviewmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Earnings Smoothing, Cash Flow Volatility, and CEO Cash Bonus

Das

Hong

Kim

2013

The Financial Review

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“…In contrast, other studies view income smoothing as a vehicle for managers to reveal their private information about future earnings (Kirschenheiter and Melumad 2002;Ronen and Sadan 1981;Sankar and Subramanyam 2001;Demski 1998 Private information about future earnings can also be communicated passively. Sankar and Subramanyam (2001) demonstrate that managers smooth income to smooth consumption and that in so doing they reveal private information about future earnings.…”

Section: Income Smoothing: Motivations and Effectsmentioning

confidence: 99%

Does Income Smoothing Improve Earnings Informativeness?

Tucker

Zarowin

2005

SSRN Journal

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This paper uses a new approach to examine whether income smoothing garbles earnings information or improves the informativeness of past and current earnings about future earnings and cash flows. We measure income smoothing by the negative correlation of a firm's change in discretionary accruals with its change in pre-managed earnings. Using the approach of Collins, Kothari, Shanken and Sloan (1994), we find that change in the current stock price of higher-smoothing firms contains more information about their future earnings than does change in the stock price of lower-smoothing firms.This result is robust to decomposing earnings into cash flows and accruals and to controlling for firm size, growth, future earnings variability, private information search activities, and cross-sectional correlations.

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“…According to Kirschenheiter and Melumad (2004) high quality earnings are earnings that are more informative and closer to the long run value of the firm. Revsine e.a.…”

Section: Earnings Quality Literature Reviewmentioning

confidence: 99%

“…A possible explanation for the multiplicity of those different interpretations could be that different readers use the information to make different decisions (Kirschenheiter and Melumad, 2004).…”

Section: Earnings Quality Literature Reviewmentioning

confidence: 99%