One way to smooth earnings is to use accounting changes. This paper focuses on discretionary accounting changes as the smoothing device used by firms. This paper tests for smoothing behavior as a function of incentives. The association between the smoothing behavior displayed within a sample of firms and firm-specific explanatory variables is examined.

This study examines the links between corporate governance, income smoothing, and informativeness in financial reporting. Firms’ strong corporate governance is measured by variables employed in other studies – the presence of a financial expert serving on the audit committee; whether the audit committee consists entirely of independent directors; whether the members of the audit committee meet at least four times annually; and the percentage of outsiders serving on the board of directors. Income smoothing is measured by the Albrecht-Richardson (AR) and Tucker-Zarowin (TZ) income smoothing measures. The AR measure encompasses four definitions of earnings that include accrual and cash-based transactions. The TZ measure includes only accrual-based transactions. The degree of informativeness is measured by association with two opposing ends of the spectrum. On the one hand, firms that are the most informative are predicted to have a greater association between earnings and one period ahead operating cash flows. Prior researchers have defined in a similar manner the information content of earnings to predict cash flows. On the other hand, the existence of a regulatory violation clearly indicates firms’ lack of informativeness (i.e., deceptiveness) in financial reporting. The results do not show a strong relationship between strong corporate governance and degree of income smoothing. First, results for the link between income smoothing and informativeness show only a strong, positive association between accrual-based income smoothing (i.e., TZ measure) and informativeness. Second, results for the links between deceptiveness, corporate governance, and income smoothing are weak. The corporate governance variables show no significant association with deceptiveness. A negative relationship between corporate governance and deceptiveness was predicted. For the link between income smoothing and deceptiveness, only the AR measures show the predicted negative relationship. The TZ measure shows no significant association with deceptiveness. Taken together, the results of this study provide unique insights into the links between corporate governance, income smoothing, and informativeness in financial reporting. The results confirm the informativeness of accrual accounting, but do not resolve the debate of whether corporate governance measures impact the quality of financial reporting.

Este estudo teve como objetivo geral verificar o efeito das práticas de income smoothing (suavização dos resultados) no custo de capital próprio (Ke) das empresas brasileiras de capital aberto em dois momentos distintos: 2004 a 2007 (antes da adoção das IFRS) e 2011 a 2014 (após a adoção das IFRS). Por income smoothing entende-se como o amortecimento intencional dos resultados da empresa, feita pelo gestor via seu poder discricionário, com o intuito de reduzir a variabilidade dos lucros e, assim, transmitir ao mercado consistência de seus resultados. O custo de capital próprio, por sua vez, evidencia o retorno exigido pelo investidor, o que ocasiona a sua utilidade na tomada de decisão. Como o investidor espera obter um retorno do ativo acima de outro de risco similar, é esperado que as suas decisões sejam alteradas na medida que as empresas se utilizam do income smoothing. Como proxy para identificar a suavização dos resultados, foram selecionadas três métricas constantemente utilizadas na literatura. Além de tais métricas, como metodologia contributiva, foi elaborado, por meio da Análise Fatorial, um fator baseado nas três medidas, dado que os métodos para identificar a suavização são discrepantes e o uso do fator possibilita a conjunção da informação contida nos três métodos. A amostra selecionada contempla 105 empresas no primeiro período e 206 no segundo. O Ke foi calculado utilizando a metodologia por benchmark. Para explicar os efeitos no Ke devido a prática de income smoothing, a regressão linear múltipla por meio de mínimos quadrados ordinários (MQO) foi aplicada para cada período de análise. Também foram aplicadas duas outras regressões: uma com diferenças em diferenças e outra com dados em painel MQO pooled (antes e após a adoção das IFRS) para a verificação de quebra estrutural. Os resultados mostraram que no período 2004-2007 apenas a métrica EM2 foi significativa na explicação do Ke. No período que compreende 2011-2014, tanto a métrica EM1 quanto o Fator foram estatisticamente significativos. Ainda de acordo com os resultados obtidos, verifica-se que houve alteração significativa no Ke após a adoção das IFRS e que pode ter alterado a forma como as métricas identificam o income smoothing. De maneira geral, o investimento em uma empresa suavizadora é inversamente proporcional ao seu Ke, ou seja, o mercado entende que investir em empresa que adota a prática de suavização dos resultados, implica em um menor retorno exigido. / This study aimed to verify the effect of income smoothing practices in the cost of equity (Ke) of Brazilian public companies in two distinct periods: 2004 to 2007 (before adopting IFRS) and 2011-2014 (after adopting IFRS). Income smoothing is understood as the company´s intentional dampening of the results, made by the manager due to his discretionary power, in order to reduce the variability of profits and thus convey to the market consistency of results. The cost of equity capital highlights the return required by the investor, which is useful in decision making. Since the investor expects to achieve an active return above other similar risk, it is expected a change in decisions when firms use the income smoothing. As a proxy to identify the smoothing of results, three metrics constantly used in the literature were selected. In addition to such metrics, Factor Analysis, a factor based on the three measurements was developed as contributory methodology, since the methods to identify the smoothing are disparate the use of the factor enables combining the information contained in the three methods. The selected sample includes 105 companies in the first period and 206 in the second. The Ke was calculated based on benchmark. To explain the effects on Ke due to the practice of income smoothing, linear multiple regression using ordinary least squares (OLS) was applied in each period analyzed. Besides applying two other regressions: one with differences in differences and another with OLS panel pooled data (before and after the adoptng IFRS) to verify structural break. The results showed that in the period of 2004-2007 the metric EM2 was significant to explain the Ke. In the period between 2011-2014, both the metric EM1 as well as the factor were statistically significant. Also according to the results, it appears that there was a significant change in the Ke after adopting IFRS and that may have changed the way the metrics identify the income smoothing. In general, the investment in a smothing company is inversely proportional to its Ke, that is, the market understands that investing in a company that adopts the practice of income smoothing, implies in a lower required return.

Este estudo teve como objetivo geral verificar o efeito das práticas de income smoothing (suavização dos resultados) no custo de capital próprio (Ke) das empresas brasileiras de capital aberto em dois momentos distintos: 2004 a 2007 (antes da adoção das IFRS) e 2011 a 2014 (após a adoção das IFRS). Por income smoothing entende-se como o amortecimento intencional dos resultados da empresa, feita pelo gestor via seu poder discricionário, com o intuito de reduzir a variabilidade dos lucros e, assim, transmitir ao mercado consistência de seus resultados. O custo de capital próprio, por sua vez, evidencia o retorno exigido pelo investidor, o que ocasiona a sua utilidade na tomada de decisão. Como o investidor espera obter um retorno do ativo acima de outro de risco similar, é esperado que as suas decisões sejam alteradas na medida que as empresas se utilizam do income smoothing. Como proxy para identificar a suavização dos resultados, foram selecionadas três métricas constantemente utilizadas na literatura. Além de tais métricas, como metodologia contributiva, foi elaborado, por meio da Análise Fatorial, um fator baseado nas três medidas, dado que os métodos para identificar a suavização são discrepantes e o uso do fator possibilita a conjunção da informação contida nos três métodos. A amostra selecionada contempla 105 empresas no primeiro período e 206 no segundo. O Ke foi calculado utilizando a metodologia por benchmark. Para explicar os efeitos no Ke devido a prática de income smoothing, a regressão linear múltipla por meio de mínimos quadrados ordinários (MQO) foi aplicada para cada período de análise. Também foram aplicadas duas outras regressões: uma com diferenças em diferenças e outra com dados em painel MQO pooled (antes e após a adoção das IFRS) para a verificação de quebra estrutural. Os resultados mostraram que no período 2004-2007 apenas a métrica EM2 foi significativa na explicação do Ke. No período que compreende 2011-2014, tanto a métrica EM1 quanto o Fator foram estatisticamente significativos. Ainda de acordo com os resultados obtidos, verifica-se que houve alteração significativa no Ke após a adoção das IFRS e que pode ter alterado a forma como as métricas identificam o income smoothing. De maneira geral, o investimento em uma empresa suavizadora é inversamente proporcional ao seu Ke, ou seja, o mercado entende que investir em empresa que adota a prática de suavização dos resultados, implica em um menor retorno exigido. / This study aimed to verify the effect of income smoothing practices in the cost of equity (Ke) of Brazilian public companies in two distinct periods: 2004 to 2007 (before adopting IFRS) and 2011-2014 (after adopting IFRS). Income smoothing is understood as the company´s intentional dampening of the results, made by the manager due to his discretionary power, in order to reduce the variability of profits and thus convey to the market consistency of results. The cost of equity capital highlights the return required by the investor, which is useful in decision making. Since the investor expects to achieve an active return above other similar risk, it is expected a change in decisions when firms use the income smoothing. As a proxy to identify the smoothing of results, three metrics constantly used in the literature were selected. In addition to such metrics, Factor Analysis, a factor based on the three measurements was developed as contributory methodology, since the methods to identify the smoothing are disparate the use of the factor enables combining the information contained in the three methods. The selected sample includes 105 companies in the first period and 206 in the second. The Ke was calculated based on benchmark. To explain the effects on Ke due to the practice of income smoothing, linear multiple regression using ordinary least squares (OLS) was applied in each period analyzed. Besides applying two other regressions: one with differences in differences and another with OLS panel pooled data (before and after the adoptng IFRS) to verify structural break. The results showed that in the period of 2004-2007 the metric EM2 was significant to explain the Ke. In the period between 2011-2014, both the metric EM1 as well as the factor were statistically significant. Also according to the results, it appears that there was a significant change in the Ke after adopting IFRS and that may have changed the way the metrics identify the income smoothing. In general, the investment in a smothing company is inversely proportional to its Ke, that is, the market understands that investing in a company that adopts the practice of income smoothing, implies in a lower required return.

Redovisningen har många olika nyanser, vilket beror på alla de möjliga val som en redovisareställs inför. Copeland (1968) säger att det finns 30 miljoner olika sätt, på vilket ett företagsresultat kan beräknas, inom ramen för de redovisningsstandarder som finns. Med det sagt, kanmanipulering av resultatet koordineras med en standard eller utan en standard. I bakgrundenav studien presenterar vi begreppet income smoothing och i problemdiskussionen utvecklar vibegreppet ett steg längre genom att utveckla ett koncept av tre relaterande begrepp; motivstruktur-resultat. Därefter såg vi det utifrån en praktisk synvinkel och utvecklade treforskningsfrågor: Hur utbrett är income smoothing bland stora svenska företag? Vilka motivoch vilken struktur har svenska börsnoterade företag för att jämna ut sina resultat? Vilkeneffekt får income smoothing på företagets börsvärde? Vidare har vår metod till största delvarit operationell då vi utvecklat konceptet motiv-struktur-resultat och använt finansiellarapporter som informationskälla. Vi har även gjort en teknisk analys genom att vi använtKustonos (2011) modell för att kategorisera företag som en smoother eller icke-Smoother.Teorin som vi presenterar i den teoretiska referensramen kommer från relevant litteratur ochanvänds sedan för att analysera våra resultat.Vår studie har bidragit med tre saker. (1) Den har ökat kunskapen kring income smoothing iSverige. (2) Den har visat att income smoothing inte är vanligt förekommande bland storasvenska företag. (3) Den har bidragit med en teoretisk utveckling genom konceptet motivstruktur-resultat, för att skapa ett observerbart kriterium för förståelse av manipulering isvensk redovisning. / Program: Civilekonomprogrammet

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This dissertation examines the effect of income smoothing on information uncertainty, stock returns, and cost of equity. Following existing literature, I construct two income smoothing measures - capturing income smoothing through both total accruals and discretionary accruals. I show that income smoothing tends to reduce firms' information uncertainty, as measured by stock return volatility, analyst forecast dispersion, and analyst forecast error. Further, I provide evidence that market prices income smoothing and rewards income smoothing firms with a premium. Controlling for unexpected earnings shocks and other firm characteristics, income smoothing firms have significantly higher abnormal returns around earnings announcement. Finally, I show that income smoothing, particularly through discretionary accruals, reduces firms' implied cost of equity.

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