Study On Determinants And Market Reaction Of Income Smoothing

The subject of income smoothing has been studied for more than fifty years in western accounting theoretical circle. With the development of stock market and the surging of listed companies in our country, income smoothing turned up in listed companies, which has become one of the new subjects of accounting theory and practice in our country. Income smoothing has positive and negative effect on our economy. If income smoothing has been abused in listed companies, its negative effect will exceed its positive effect. In order to standardize the accounting behavior of listed companies and promote the development of the stock market, it is necessary to probe into the issue of income smoothing in listed companies. Considering this point, the thesis tries to study the subject from several major perspectives. There are two parts in this paper. The first part of this paper includes chapter 2 and chapter 3. In chapter 2, the conceptual framework concerning income smoothing including the definition, categories and ways of income smoothing was introduced by normative approach. In chapter 3, the relevant theories of income smoothing including selective financial misrepresentation hypothesis, accounting information perspective, functional fixation hypothesis, principle-agent theory and information asymmetry were introduced. And the relationship between above mentioned theories (or theoretic hypothesis) and income smoothing was discussed. The second part of this paper includes chapter 4 and 5 and it is the core of this paper. In chapter 4, the listed companies having the voluntary accounting policy changes in the period from 1998 to 2003 were collected as research sample. The influential factors of Chinese listed companies'behaviors of income smoothing were testified by methods of mean value test and multivariate linear regression. The influential factors of income smoothing include enterprise's scale, pay contract, the divergence of actual earnings from expectations, the impact of the accounting change on the lever of earnings and past earnings variability, which correlate positively with it. In chapter 5, the listed companies having the voluntary accounting policy changes in the period from 1998 to 2000 were collected as research sample. By methods of mean value test and buy-and-hold, the long term market reaction of income smoothing was testified. The result shows that the long term market reaction of income smoothing of Chinese listed companies is positive.