Smoothing income in anticipation of future earnings

Abstract

Recent theory argues that concern about job security creates an incentive for managers to smooth earnings in consideration of both current and future relative performance. We find support for this theory. Our evidence suggests that when current earnings are `poor' and expected future earnings are `good', managers `borrow' earnings from the future for use in the current period. Conversely, when current earnings are `good' and expected future earnings are `poor' managers `save' current earnings for possible use in the future. However, sensitivity analysis indicates that we cannot rule out selection bias as a potential alternative explanation for our findings