A Study Of Profitable Firms’Income Smoothing Issue

Income Smoothing has been a very common phenomenon in China. Profitable firms tend to modify the profit to reach the goal of income smoothing. With a company taking action of income smoothing, its market price will increase. However, if the income smoothing goes beyond a reasonable range, it will have a bad effect on the reliability of accounting information and the optimizing resource distribution function of market. It is still short of deep and systematic research on income smoothing issue in China’s capital market among the academia. The implementation of2007Corporation Accounting Standard provides a good opportunity for the development of the research.Surrounding the profitable firms’income smoothing issue, this study adopts empirical tests based on corresponding theory and hypothesis, and establishes several multiple regression models, to analyze China listed companies’ data, and then test the existence and universality of income smoothing. We also try to distinguish how the factors of firms’inner management or external market and supervision affect income smoothing. Finally, we discuss what measures firms usually take to modify profit. The results prove that there are income smoothing phenomena in China’s capital market. More than90%of sample companies tend to manage their earnings by income smoothing. We also find that asset-liability ratio (Lev), the share proportion of the largest shareholder (Largest) and the proportion of independent directors (Idr) have significant positive correlation with income smoothing. But the variable of Dual and Industry haven’t passed the test. Besides, companies prefer to make use of accounts receivable, accumulated depreciation and inventory to smooth income. However, note receivable, amortization of intangible assets, long-term unamortized expenses and assets impairment loss are not the main measures of income smoothing.