Institutional ownership and income smoothing: Australian evidence

This study examines the rarely investigated association between institutional ownership and income smoothing. The results support the predicted positive association between institutional ownership and the likelihood of firms smoothing earnings towards their earnings trend in general. However, this association is not systematic across all firms. The positive association is most evident among profit firms with pre-managed earnings above their earnings trend. No significant association is found for profit firms with pre-managed earnings below their earnings trend and loss firms in general. This study also finds that, in Australia, while institutional ownership has a non-linear association with income increasing earnings management (Koh, 2003), such association manifests itself within the income smoothing framework. The results of this study highlight the complexities in the association between institutional ownership and earnings management strategies, and future research can benefit by explicitly examining the trade-offs between alternative earnings management incentives and the factors that affect the relative strength of these incentive trade-offs

Income Smoothing, Earnings Quality and Firm Valuation

Abstract:  This study argues that lower variability of earnings does not guarantee income smoothers' higher firm values. Instead, smoothers' earnings should be more value-relevant if they are of high quality, i.e., earnings quality should be considered simultaneously. Sample firms are divided into four groups: quality earnings smoothers, quality earnings non-smoothers, non-quality earnings smoothers, and non-quality earnings non-smoothers. Value relevance of reported earnings is then studied using both the levels and the changes approaches with indicator variables. Results show quality earnings smoothers have the highest price-earnings multiple while non-quality non-smoothers have the lowest price-earnings multiple. Copyright Blackwell Publishers Ltd, 2004.