Ownership Differences and Firms' Income Smoothing Behavior

Abstract

"This paper examines the association between differences in ownership structure and income smoothing behavior in firms. The underlying constructs affecting this association include agency relationships, managerial incentives, information asymmetry, and firm profitability. A logistic regression model is used to test the association between income smoothing and variables related to inside ownership, institutional holdings, leverage, managerial compensation, profitability, and firm size. The evidence suggests that ownership differences, managers' incentive structures, and firm profitability are important in explaining income smoothing behavior in firms. By separating inside ownership and levels of debt into different levels, we are able to show the existence of a non-monotonic relationship between ownership differences and firms' income smoothing behavior." Copyright Blackwell Publishers Ltd 1997.

The smoothing hypothesis, stock returns and risk in Brazil

“…A possible justification for this is that companies with less income are more inclined to smooth out their results because they can communicate to shareholders a perception of less risk and a more controlled set of income results. On the other hand, Carlson and Bathala (1997) found empirical support for their hypothesis that the more lucrative a company is, the more opportunities managers have to even out the variability of results.…”

Impact of Earnings Smoothness on Stock Prices, Stock Returns and Future Earnings Changes - the Polish Experience

“…Many empirical studies confirmed that smooth past earnings are viewed favourably by the markets, and firms with smoother income series are perceived as being less risky (Wang and Williams 1994). Others found that institutional investors and analysts tend to prefer companies with smooth earnings (Badrinath et al 1989;Previts et al 1994;Carlson and Bathala 1997).…”

Privatized Returns and Socialized Risks: CEO Incentives, Securitization Accounting and the Financial Crisis

“…Nonetheless, as stock and option-based compensation increases the executive's personal portfolio becomes less diversified and the executive becomes more risk averse and more likely to pursue strategies aimed at mitigating the risk of the institution (Smith and Stulz, 1985). Moreover high levels of perceived risks can negatively affect a manager's tenure and job security (Ronen and Sadan, 1981;Carlson and Bathala, 1997) and can harm her reputational and human capital. As a consequence, it could be possible that, even if CEOs are provided with risk incentives, they prefer the low risk scenario that ensures W 1 instead of betting on risky lending activities that could deliver W 2 but also W 0 .…”