Smoothing and Earnings Management Policies
This chapter lays the first bases on the concept smoothing. This latter topic is inserted in a broader context that is those of earnings quality management. Moreover, this chapter explains the real earnings management policies such as income smoothing, big bath earnings management, and income minimization and income maximization policies.
An earnings management strategy that has survived the test of time is smoothing. Smoothing is the dampening of fluctuations in the series of reported earnings.
This chapter tries to understand the motivations to smooth along the two dimensions of capital markets and governance. The capital market-oriented motivation centers on the informational value of smoothing and the demand for consumption smoothing. The governance motivation centers on the smoothing incentives of an agent in multiperiod principal–agent relationships.
KeywordsSmoothing Banking system Earnings management Reporting Earning quality Income Financial statement
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