The effect of SFAS 144 on managers' income smoothing behavior

This study assesses the unintended effects of recent accounting regulation (SFAS 144) on a specific form of real activities earnings management, namely the timing of asset sales to smooth income. This paper finds that, by changing the qualifying criteria for discontinued operations, SFAS 144 has mitigated income smoothing through the timing of asset sales. In addition, this study documents that the timing of asset sales to smooth earnings is not chosen in isolation (as assumed by prior earnings management literature), but it is part of a broader smoothing strategy that involves the timing of nonrecurring items in general. The evidence is consistent with managers concurrently timing asset sales with other nonrecurring items (of opposite signs) to smooth their effect and thus, smooth earnings. Because of this concurrent timing behavior, SFAS 144 appears to have a spillover effect on the timing of other nonrecurring items reported concurrently with asset sales.