Accounting Income Smoothing And Stockholder Wealth

Abstract

Contrary to the widespread view that the accounting income smoothing phenomenon is a revelation of cheating and misleading on the part of the firms management, this study demonstrates that income smoothing enhances the informational value of reported earnings. Furthermore, this study documents consistent evidence indicating that smoothed income numbers are viewed favorably by the markets, and firms with smoother income series are perceived as being less risky. The findings suggest that income smoothing can be beneficial to both existing stockholders and prospective investors.