The net income smoothing and the persistence of earnings accounts in Brazilian public companies

Abstract

The literature is not conclusive whether the income smoothing represents or not good quality of the accounting information, since it is a form of earnings management and since it is also associated with the earnings persistence. This paper uses the income accounts as a means to verifying whether the income smoothing, in the interests of the managers, can coexist with the persistence, giving the investors greater capacity to predict future cash flows. With the sample formed by 295 Brazilian companies, in the period from 2010 to 2015, we verified that there are accounts classified by their function, which form the net income and are persistent, but when observed the treatment group formed only by the companies that smoothed more, we verified that there are accounts that maintain their persistence, but some does not present significant persistence. In another sample formed by 76 companies that most smoothed, with the treatment group formed by companies that smoothed with discretionary accruals, it was observed that selling expense and other operating revenue/expense remain persistent. These results suggest that the association between income smoothing and persistence occurs through the income accounts that compose it, but there is a reduction of predictive capacity in companies with smoothed net income.