Earnings Smoothing: Does It Exacerbate or Constrain Stock Price Crash Risk?

Friday, November 17, 2017

SAF professors Changling Chen and Jeong-Bon Kim had their research highlighted in the "Industry Trends, Research and Commentary" section of the CFA Institute's Selections publication.

"Do managers smooth earnings to inform investors about a corporation’s long-run performance, or to hide bad news for their own opportunistic purposes? SAF authors conclude that bad news hiding is the underlying incentive of earnings smoothing for managers of these weakly monitored firms." 

Summary of the paper:

Prepared by Marla Howard, CFA, University of Maryland University College.

Earnings smoothing by management is commonplace. The authors find evidence of adverse downside consequences of earnings smoothing, indicating that managers’ opportunistic motivations are more prevalent than their desire to signal private information and resulting in economically significant stock price deterioration. The negative impact is reduced when analysts and institutional owners effectively monitor firms.

The published paper can be read on the CFA Institute website and is available through SSRN.