Matching、earnings Smoothing And Firm Value

Earnings smoothing has sixty years of history in the accounting academics of the West as the subject of accounting research and regulatory bodies concerned. However, there are doubts about earnings smoothing whether the smoothed earnings data is the illusion of confusing stakeholders by managers or has substantial information content? Most scholars have different conclusions because of the surplus, the reason lies in failing to have a deep understanding of the essential characteristics of earnings smoothing.This paper divides earnings smoothing into information attributes and opportunism attributes which is potentially competitive in order to better understand the nature feature of earnings smoothing. The information attributes is defined as inherent earnings smoothing through the firms ’real activities to achieve,created by company fundamentals, driven by company characteristics(real earnings smoothing which can increase corporate transparency), and it can be explained by inherent fundamental factors of firms as managers ’private beliefs and an effective form of passing the firms’ future performance information. The opportunism attributes is defined as follows: managers behavior for private interests by manipulating earnings through discretionary activities and distorting(altering) earnings information or to improve information content of past and present earnings to future earnings and cash flows and thus affecting reporting.Matching principle is the basis for recognition and measurement of earnings under accrual, earnings smoothing is a product under accrual, and managers accounting judgments are core of accrual accounting.Seen in this light, managers accounting judgments occupy an important place in the relation between the matching and earnings smoothing. Whether managers’ using accounting judgments properly makes earnings smoothing the inherent firms characteristics of driving results under matching principle, or it may be the result of opportunistic motives by managers to “manage” the earnings. Many scholars have controversies about value relevance research of earnings smoothing. Some studies suggest that smoothed earnings transfers decision-useful information to investors, thus enhancing firm value; the other studies suggest that earnings smoothing may blur the volatility of real economic performance, misleading investors making decisions, thus reducing the firm value. Therefore, our paper discusses factors and economic consequences of earnings smoothing based on information attributes and opportunism attributes of earnings smoothing, not only to deepen the understanding of the essential characteristics of earnings smoothing, but also to understand the role of matching and earnings smoothing in the quality of accounting earnings information and the characteristics of investor reaction to different attributes of earnings smoothing.Our paper separates earnings smoothing into information attributes and opportunism attributes. First,we provide more comprehensive empirical evidence on the relation of matching and the attributes of earnings smoothing using the data of China A-share listed companies from 2004-2014. The results show that managers’ reasonable accounting professional judgement helps matching between revenues and expenses to increase the earnings smoothing information effect, while managers’ abusing accounting judgments leads to negative correlation between matching and opportunism attribute of earnings smoothing.Second, we do a research about extending the earnings smoothing information effect. We use Internal Governance Index and Audit Quality to represent firms’ supervision and restraint mechanisms to examine the impact of both on earnings smoothing information effect of matching in listed companies in China. The empirical results show that firms internal governance structure as the cornerstone of strengthen managers’ accounting professional judgement, enhances earnings smoothing information effect of matching, but managers take into account that high quality auditors for audit risk have a preference of asymmetry confirmation between revenues and expenses and their accounting professional judgement has a bias, thus weakening the earnings smoothing information effect of matching. Finally, we use China A-share listed companies from 2008-2014 as samples. We have an empirical test about the impact of earnings smoothing information and opportunistic attributes on firm value. The results verify that with the effectiveness of thesecurities market gradually improving, investors become increasingly mature and can screen different informativeness of earnings smoothing effectively by analysis and judgement in turn making a different reaction, reflecting the awareness of investors.