This dissertation examines the effect of income smoothing on information uncertainty, stock returns, and cost of equity. Following existing literature, I construct two income smoothing measures – capturing income smoothing through both total accruals and discretionary accruals. I show that income smoothing tends to reduce firms’ information uncertainty, as measured by stock return volatility, analyst forecast dispersion, and analyst forecast error. Further, I provide evidence that market prices income smoothing and rewards income smoothing firms with a premium. Controlling for unexpected earnings shocks and other firm characteristics, income smoothing firms have significantly higher abnormal returns around earnings announcement. Finally, I show that income smoothing, particularly through discretionary accruals, reduces firms’ implied cost of equity.
|Advisor:||Dhaliwal, Dan S.|
|Commitee:||Bens, Daniel A., Li, Zhen, Trombley, Mark A.|
|School:||The University of Arizona|
|School Location:||United States -- Arizona|
|Source:||DAI-A 70/04, Dissertation Abstracts International|
|Keywords:||Earnings announcement returns, Implied cost of equity, Income smoothing, Information uncertainty|
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