Effect of intentional income smoothing on the earnings persistence of publicly traded brazilian companies
Keywords:
Earnings Persistence. Intentional Income Smoothing. Quality of Accounting Information.
Abstract
Our study aims to analyze the effect of intentional income smoothing on the earnings persistence of publicly traded Brazilian companies. Our sample consisted of 140 companies when considering quarterly periods from 2013 to 2018. We measured the earnings persistence was through the metric of Dichev and Tang (2009). For the intentional income smoothing, we used two measures in the work of Lang, Lins and Maffett (2012). We analyzed the data based on descriptive statistics and, subsequently, through quantile regression, using 0.10 quantiles; 0.25; 0.50; 0.75 and 0.90. The results suggest that the earnings persistence decreased over the period in all analyzed percentiles. Percentile 10 (P10) and Percentile 25 (P25) presented the most accentuated reductions, with 58.15% and 31.68%, respectively. The findings also show that when the manager uses the more general income smoothing, the earnings persistence decreases. When the manager makes use of smoothing through accruals with the objective of offsetting net income with smoothing from previous years, it implies a decrease in the persistence of profits, except for the 0.10 and 0.90 quantiles. Based on this evidence, we can contribute to the literature by addressing a new perspective on the theme, that is, evaluating only the consequences of the intentional portion of income smoothing. We hope to assist investors and creditors with the decision-making process, as earnings persistence is a characteristic of the quality of accounting information.
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References
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KAJIMOTO, C. G. K.; NAKAO, S. H. Persistência do lucro tributável com a adoção das IFRS no Brasil. Contabilidade Vista & Revista, v. 29, n. 1, p. 130-149, 2018.
KOENKER, R.; BASSETT JR, G. Regression quantiles. Econometrica: journal of the Econometric Society, p. 33-50, 1978.
KOLOZSVARI, A. C.; MACEDO, M. A. S. Análise da influência da presença da suavização de resultados sobre a persistência dos lucros no mercado brasileiro. Revista Contabilidade & Finanças, v. 27, n. 72, p. 306-319, 2016.
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LEUZ, C.; NANDA, D.; WYSOCKI, P. D. Earnings management and investor protection: an international comparison. Journal of financial economics, v. 69, n. 3, p. 505-527, 2003.
LEV, B. Some economic determinants of time-series properties of earnings. Journal of Accounting and Economics, v. 5, p. 31-48, 1983.
LI, V. The effect of real earnings management on the persistence and informativeness of earnings. The British Accounting Review, v. 51, n. 4, p. 402-423, 2019.
MARRA, A.; MAZZOLA, P.; PRENCIPE, A. Board monitoring and earnings management pre-and post-IFRS. The International Journal of Accounting, v. 46, n. 2, p. 205-230, 2011.
MCVAY, S.; NAGAR, V.; TANG, V. W. Trading incentives to meet the analyst forecast. Review of Accounting Studies, v. 11, n. 4, p. 575-598, 2006.
MOSES, O. D. Income smoothing and incentives: Empirical tests using accounting changes. Accounting Review, p. 358-377, 1987.
MYERS, J. N.; MYERS, L. A.; SKINNER, D. J. Earnings momentum and earnings management. Journal of Accounting, Auditing & Finance, v. 22, n. 2, p. 249-284, 2007.
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SILVA, A. F. Weffort, E. F. J.; Flores, E. D. S.; Silva, G. P. D. Earnings management and economic crises in the Brazilian capital market. Revista de Administração de Empresas, v. 54, n. 3, p. 268-283, 2014.
SLOAN, R. G. Do stock prices fully reflect information in accruals and cash flows about future earnings?. Accounting review, p. 289-315, 1996.
SOHN, B. C. The effect of accounting comparability on the accrual-based and real earnings management. Journal of Accounting and Public Policy, v. 35, n. 5, p. 513-539, 2016.
SUH, Y. S. Communication and income smoothing through accounting method choice. Management Science, v. 36, n. 6, p. 704-723, 1990.
TRISANTI, T. The Effect of Non-recurring Item Transactions on the Possibility of Firms to Smooth Income: the Case of Indonesian Listed Firms. Jurnal Akuntansi dan Auditing Indonesia, v. 17, n. 2, p. 123-134, 2013.
TUCKER, J. W.; ZAROWIN, P. A. Does income smoothing improve earnings informativeness? The accounting review, v. 81, n. 1, p. 251-270, 2006.
VERRECCHIA, R. E.; WEBER, J. Redacted disclosure. Journal of Accounting Research, v. 44, n. 4, p. 791-814, 2006.
WANG, Z. Measuring investors’ assessment of earnings persistence: do investors see through smoothed earnings?. Review of Quantitative Finance and Accounting, v. 42, n. 4, p. 691-708, 2014.
WATTS, R. L.; ZIMMERMAN, Jerold L. Positive accounting theory. 1986.
ALMEIDA, J. E. F.; Sarlo Neto, A.; Bastianello, R. F.; Moneque, E. Z. Alguns aspectos das práticas de suavização de resultados no conservadorismo das companhias abertas listadas na BM & FBovespa. Revista Contabilidade & Finanças, v. 23, n. 58, p. 65-75, 2012.
BAGNOLI, M.; WATTS, S. G. Oligopoly, disclosure, and earnings management. The Accounting Review, v. 85, n. 4, p. 1191-1214, 2010.
BAIK, B.; CHOI, S.; FARBER, D. B. Managerial ability and income smoothing. The Accounting Review, 2019.
BARTH, M. E.; LANDSMAN, Wayne R.; LANG, M. H. International accounting standards and accounting quality. Journal of accounting research, v. 46, n. 3, p. 467-498, 2008.
CANAY, I. A. A simple approach to quantile regression for panel data. The Econometrics Journal, v. 14, n. 3, p. 368-386, 2011.
CARVALHO, L. N.; SALOTTI, B. M. Adoption of IFRS in Brazil and the consequences to accounting education. Issues in Accounting Education, v. 28, n. 2, p. 235-242, 2013.
COHEN, D. A.; ZAROWIN, P. Accrual-based and real earnings management activities around seasoned equity offerings. Journal of accounting and Economics, v. 50, n. 1, p. 2-19, 2010.
COPELAND, R. M. Income smoothing. Journal of Accounting Research, p. 101-116, 1968.
DECHOW, P. M.; DICHEV, I. D. The quality of accruals and earnings: The role of accrual estimation errors. The accounting review, v. 77, n. s-1, p. 35-59, 2002.
DECHOW, P.; SCHRAND, C. Earnings Quality. The Research Foundation of CFA Institute. Charlottesville, Virginia, 2004.
DECHOW, P. M.; SLOAN, R. G.; SWEENEY, Amy P. Detecting earnings management. Accounting review, p. 193-225, 1995.
DECHOW, P.; GE, W.; SCHRAND, C. Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of accounting and economics, v. 50, n. 2-3, p. 344-401, 2010.
DEFOND, M. L.; JIAMBALVO, J. Debt covenant violation and manipulation of accruals. Journal of accounting and economics, v. 17, n. 1-2, p. 145-176, 1994.
DICHEV, I. D.; TANG, V. W. Earnings volatility and earnings predictability. Journal of accounting and Economics, v. 47, n. 1-2, p. 160-181, 2009.
DOPUCH, N.; DRAKE, D. F. The effect of alternative accounting rules for nonsubsidiary investments. Journal of Accounting Research, p. 192-219, 1966.
DOYLE, J.; GE, W.; MCVAY, S. Determinants of weaknesses in internal control over financial reporting. Journal of accounting and Economics, v. 44, n. 1-2, p. 193-223, 2007.
DUARTE, F. C. L.; GIRÃO, L. F. A. P.; PAULO, E. Avaliando Modelos Lineares de Value Relevance: Eles Captam o que Deveriam Captar?. Revista de Administração Contemporânea, v. 21, n. spe, p. 110-134, 2017.
ECKEL, N. The income smoothing hypothesis revisited. Abacus, v. 17, n. 1, p. 28-40, 1981.
FRANCIS, J.; HANNA, J. D.; VINCENT, L. Causes and effects of discretionary asset write-offs. Journal of Accounting Research, v. 34, p. 117-134, 1996.
FRANCIS, J.; LaFond, R.; Olsson, P. M.; Schipper, K. Costs of equity and earnings attributes. The accounting review, v. 79, n. 4, p. 967-1010, 2004.
GAGANIS, C.; HASAN, I.; PASIOURAS, F. Regulations, institutions and income smoothing by managing technical reserves: International evidence from the insurance industry. Omega, v. 59, p. 113-129, 2016.
GE, W. Essays on real earnings management. 2009. Tese de Doutorado. McGill University.
GOEL, S. Financial Reporting–the Old Age Tussle between Legality and Quality in Context of Earnings Management. Procedia Economics and Finance, v. 3, p. 576-581, 2012.
GORDON, M. J. Discussion of the effect of alternative accounting rules for nonsubsidiary investments. Journal of Accounting Research, p. 220-223, 1966.
HEALY, P. M.; WAHLEN, James M. A review of the earnings management literature and its implications for standard setting. Accounting horizons, v. 13, n. 4, p. 365-383, 1999.
JONES, J. J. Earnings management during import relief investigations. Journal of accounting research, v. 29, n. 2, p. 193-228, 1991.
KAJIMOTO, C. G. K.; NAKAO, S.; MORAES, M. B. C. A suavização do lucro líquido e a persistência das contas de resultado nas empresas brasileiras de capital aberto. Revista de Contabilidade e Organizações, v. 13, p. 154-173, 2019.
KAJIMOTO, C. G. K.; NAKAO, S. H. Persistência do lucro tributável com a adoção das IFRS no Brasil. Contabilidade Vista & Revista, v. 29, n. 1, p. 130-149, 2018.
KOENKER, R.; BASSETT JR, G. Regression quantiles. Econometrica: journal of the Econometric Society, p. 33-50, 1978.
KOLOZSVARI, A. C.; MACEDO, M. A. S. Análise da influência da presença da suavização de resultados sobre a persistência dos lucros no mercado brasileiro. Revista Contabilidade & Finanças, v. 27, n. 72, p. 306-319, 2016.
LAND, J.; LANG, Mark H. Empirical evidence on the evolution of international earnings. The accounting review, v. 77, n. s-1, p. 115-133, 2002.
LANG, M.; LINS, K. V.; MAFFETT, M. Transparency, liquidity, and valuation: International evidence on when transparency matters most. Journal of Accounting Research, v. 50, n. 3, p. 729-774, 2012.
LANG, M.; RAEDY, J. S.; WILSON, W. Earnings management and cross listing: Are reconciled earnings comparable to US earnings?. Journal of accounting and economics, v. 42, n. 1-2, p. 255-283, 2006.
LEE, C. J.; LI, L. Y.; YUE, H. Performance, growth and earnings management. Review of Accounting Studies, v. 11, n. 2-3, p. 305-334, 2006.
LEUZ, C.; NANDA, D.; WYSOCKI, P. D. Earnings management and investor protection: an international comparison. Journal of financial economics, v. 69, n. 3, p. 505-527, 2003.
LEV, B. Some economic determinants of time-series properties of earnings. Journal of Accounting and Economics, v. 5, p. 31-48, 1983.
LI, V. The effect of real earnings management on the persistence and informativeness of earnings. The British Accounting Review, v. 51, n. 4, p. 402-423, 2019.
MARRA, A.; MAZZOLA, P.; PRENCIPE, A. Board monitoring and earnings management pre-and post-IFRS. The International Journal of Accounting, v. 46, n. 2, p. 205-230, 2011.
MCVAY, S.; NAGAR, V.; TANG, V. W. Trading incentives to meet the analyst forecast. Review of Accounting Studies, v. 11, n. 4, p. 575-598, 2006.
MOSES, O. D. Income smoothing and incentives: Empirical tests using accounting changes. Accounting Review, p. 358-377, 1987.
MYERS, J. N.; MYERS, L. A.; SKINNER, D. J. Earnings momentum and earnings management. Journal of Accounting, Auditing & Finance, v. 22, n. 2, p. 249-284, 2007.
PAULO, E.; MOTA, R. H. G. Ciclos econômicos e estratégias de gerenciamento de resultados contábeis: um estudo nas companhias abertas brasileiras. Revista Contabilidade & Finanças, v. 30, n. 80, 216-233, 2019.
RIBEIRO, A. M.; SOUSA, A. M.; VICENTE, E. F. R.; CARMO, C. H. S. Income smoothig e comparabilidade dos relatórios: evidências em empresas brasileiras de capital aberto. In: XVII Congresso Internacional de Contabilidade e Auditoria, 2019, Porto - Portugal. Anais do XVII Congresso Internacional de Contabilidade e Auditoria, 2019a.
RIBEIRO, A. M.; SOUSA, A. M.; VICENTE, E. F. R. Impacto da Troca de Auditor na Comparabilidade dos Relatórios Financeiros: uma Análise em Companhias Brasileiras de Capital Aberto. In: XIX USP International Conference in Accounting, 2019, São Paulo. Anais do XIX USP International Conference in Accounting, 2019b.
RIBEIRO, A. M.; CARMO, C. H. S.; FÁVERO, L. P. L.; CARVALHO, L. N. G. Poder discricionário do gestor e comparabilidade dos relatórios financeiros: uma análise do processo de transição regulatória da contabilidade brasileira. Revista Contabilidade & Finanças-USP, v. 27, n. 70, p. 12-28, 2016.
RICHARDSON, S. A.; Sloan, R. G.; Soliman, M. T.; Tuna, I. Accrual reliability, earnings persistence and stock prices. Journal of accounting and economics, v. 39, n. 3, p. 437-485, 2005.
RODRIGUES, R. M. R. C.; MELO, C. L. L.; PAULO, E. Gerenciamento de Resultados e Nível dos Accruals Discricionários Trimestrais no Mercado Acionário Brasileiro. BBR. Brazilian Business Review, v. 16, n. 3, p. 297-314, 2019.
ROYCHOWDHURY, Sugata. Earnings management through real activities manipulation. Journal of accounting and economics, v. 42, n. 3, p. 335-370, 2006.
SCHIPPER, K.; VINCENT, L. Earnings quality. Accounting horizons, v. 17, p. 97-110, 2003.
SCOTT, W. R.; O'BRIEN, P. C. Financial accounting theory. Toronto: prentice hall, 2003.
SILVA, A. F. Weffort, E. F. J.; Flores, E. D. S.; Silva, G. P. D. Earnings management and economic crises in the Brazilian capital market. Revista de Administração de Empresas, v. 54, n. 3, p. 268-283, 2014.
SLOAN, R. G. Do stock prices fully reflect information in accruals and cash flows about future earnings?. Accounting review, p. 289-315, 1996.
SOHN, B. C. The effect of accounting comparability on the accrual-based and real earnings management. Journal of Accounting and Public Policy, v. 35, n. 5, p. 513-539, 2016.
SUH, Y. S. Communication and income smoothing through accounting method choice. Management Science, v. 36, n. 6, p. 704-723, 1990.
TRISANTI, T. The Effect of Non-recurring Item Transactions on the Possibility of Firms to Smooth Income: the Case of Indonesian Listed Firms. Jurnal Akuntansi dan Auditing Indonesia, v. 17, n. 2, p. 123-134, 2013.
TUCKER, J. W.; ZAROWIN, P. A. Does income smoothing improve earnings informativeness? The accounting review, v. 81, n. 1, p. 251-270, 2006.
VERRECCHIA, R. E.; WEBER, J. Redacted disclosure. Journal of Accounting Research, v. 44, n. 4, p. 791-814, 2006.
WANG, Z. Measuring investors’ assessment of earnings persistence: do investors see through smoothed earnings?. Review of Quantitative Finance and Accounting, v. 42, n. 4, p. 691-708, 2014.
WATTS, R. L.; ZIMMERMAN, Jerold L. Positive accounting theory. 1986.
Published
2022-05-03
How to Cite
Sousa, A. M. de, Feltes, T., Meurer, R. M., & Ribeiro, A. M. (2022). Effect of intentional income smoothing on the earnings persistence of publicly traded brazilian companies. Enfoque: Reflexão Contábil, 41(2), 87-106. https://doi.org/10.4025/enfoque.v41i2.53295
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