Compulsory disclosure and its relationship to income smoothing: Evidences in State-Owned of Paraná

Abstract

This study examines the relationship between the compulsory disclosure of financial information and the income smoothing in State-Owned companies of Paraná in the period 2010 to 2013. The theoretical research background is based on the underlying assumptions that sustain the Hypothesis of Political Costs of Watts and Zimmerman (1978) and the Agency Theory To conduct the research is used a sample of 34 non-financial companies of mixed capital of Parana State. As a proxy for income smoothing is used the metric of Eckel (1981) and two metrics of Leuz, Nanda and Wysocki (2003). To measure the compulsory disclosure, the research used a metric composed of 54 items as indicated in Law 6404/76. The main findings indicate that income smoothing and mandatory disclosure are not associated. It was expected that the results of income smoothing could influence positively and significantly at some levels of the mandatory disclosure. The results should be interpreted with caution given four reasons. First, the metrics for income smoothing are based on underlying assumptions that are not free from some specific errors or even measure problems. Second, the presence of income smoothing does not necessarily mean it is performed intentionally, meaning that they may simply result from changes in business operations. Third, due to the mandatory nature of information releases, the disclosure rates should be high. Finally, there is little research involving State-Owned Companies and its accounting practices, therefore there are many research opportunities on this field.