Market Rewards to Earnings Smoothing: Evidence from Firms’ Valuation in Nigeria

Abstract

This paper documents evidence that the Nigerian market rewards low earnings per share volatility with higher share prices. Earnings smoothing was measured by the standard deviation of earnings stream over a five year rolling period in addition to the two traditional measures that relate variability of earnings and changes in accruals to cash flows.Multiple regression was employed on a sample of 48 firms from 2013 –2015. The study found that Nigerian market rewards stable earnings over time, but are somewhat indifferent to the smoothness of past earnings in relation to cash flows. The practical implication of these findings is that managers of firms in Nigeria will take even “desperate” measures to report stable earnings to boost their firm valuations. The paper recommendsthat investors should not just reward stable earnings streams; they should be concerned with stable earnings and cash flows stability simultaneously. Failure to do so might result in earnings fraud that erodes their investments