How Does Earnings Smoothing Vary With Managerial Ability?

What is it about?

It is often assumed that “earnings management” is an opportunistic and undesirable activity. Yet, executives are responsible to manage all aspects of the business including the financial reporting process, and they are likely well informed about their company’s performance and prospects. Our research takes a disciplined, data-driven approach to investigate if high-ability executive teams are more likely to smooth earnings and if this behavior appears to benefit or harm shareholders. Our results suggest that high-ability executive teams use smoothing to report higher-quality earnings that benefit shareholders.

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Photo by Javier Allegue Barros on Unsplash

Photo by Javier Allegue Barros on Unsplash

Why is it important?

Understanding if income smoothing by high-ability managers is beneficial or harmful is important to shareholders and other stakeholders in deciding if income smoothing should be encouraged or discouraged.