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Income Smoothing, Earnings Quality and Firm Valuation
Author(s) -
Bao BenHsien,
Bao DaHsien
Publication year - 2004
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.0306-686x.2004.00583.x
Subject(s) - earnings , earnings quality , price–earnings ratio , valuation (finance) , earnings response coefficient , economics , econometrics , smoothing , value (mathematics) , post earnings announcement drift , quality (philosophy) , earnings per share , accounting , mathematics , statistics , accrual , philosophy , epistemology
This study argues that lower variability of earnings does not guarantee income smoothers’ higher firm values. Instead, smoothers’ earnings should be more value‐relevant if they are of high quality, i.e., earnings quality should be considered simultaneously. Sample firms are divided into four groups: quality earnings smoothers, quality earnings non‐smoothers, non‐quality earnings smoothers, and non‐quality earnings non‐smoothers. Value relevance of reported earnings is then studied using both the levels and the changes approaches with indicator variables. Results show quality earnings smoothers have the highest price‐earnings multiple while non‐quality non‐smoothers have the lowest price‐earnings multiple.