| Many studies have been conducted in an attempt to determine the existence of income smoothing. No studies to date, however, have consciously included the impact of the business environment as a criterion to categorize firms. It is felt that the environment may have an important impact on management's behavior and the information transmitted to the financial reporting community. The purpose of this study is to examine the possible relationship between the environment and income smoothing.;The research results indicate that firms in the high uncertainty environment did not appear to use research and development and advertising to smooth reported income. The results for the low uncertainty environment were mixed, the first four-year time period indicated smoothing did exist, the second four-year period, however, did not support this hypothesis.;This research was conducted by selecting industries which could be identified as to the business environment in which they functioned. Industries were selected which functioned in low perceived uncertainty and high perceived uncertainty. The final population consisted of 49 firms in a low uncertainty environment and 51 firms in a high uncertainty environment. The test was to examine two discretionary costs, research and development and advertising over two four-year time periods (1971-74 and 1975-78), to determine if the incurrence of these costs were incurred differently by the firms in the different environments. |
