Análisis e interpretación de los resultados de la encuesta

Eckel (1981) points out that there are two types of income smoothing: natural

and intentional smoothing. The former results from the accrual basis of accounting

process while the latter is engaged by corporate management for self-interest. As dis-

cussed in Chapter 1, income smoothing is related to both increasing and decreasing

earnings. Using solely discretionary accruals seems to fulfil a managerial require-

ment to smooth income for both goals. For example, management can over-estimate

a provision for warranty to reduce earnings during a good time or under-estimate

an allowance for doubtful accounts receivable to amplify earnings during a difficult

time.

Many studies have reported the use of accounting methods to smooth income,

such as in the banking industry (see for example, Fonseca and Gonzalez, 2008; Sood

and Abou, 2012). Apart from the banking industry, Chaney et al. (1998) find that

firms listed on the New York stock exchanges use discretionary accruals to smooth

income. Beattie et al. (1994) report that UK firms unfairly classify extraordinary

items to smooth net income before extraordinary items. Peek (2004) reports that

Dutch companies use accrual estimation to smoothing earnings. Leuz et al. (2003)

also studied the effect of institutional factors on accrual-based income smoothing

in many countries. Literature has paid little attention to the use of real activity

manipulation to smooth income. To the best our knowledge, few have studied real

activity income smoothing. For instance, Nagy and Neal (2001) find that Japanese

their peer US firms do to smooth income. Consistently, Mande et al. (2000) find

that listed Japanese firms adjust R&D to smooth income and do even more in

expansion years. While accruals can be used to both inflate and deflate earnings, real

earnings manipulation seems to be the income-increasing strategy of management

during times of difficulty (Graham et al., 2005; Roychowdhury, 2006). Walker (2013)

points out the findings of Graham et al. (2005) calling for more studies about real

activity earnings management and income smoothing.

Accounting profession and financial statement users seem to perceive income

smoothing differently. On the one hand, intentionally smoothing out fluctuating

earnings is considered undesirable by regulators (Levitt, 1998) because such smooth-

ness may misrepresent firm’s underlying economic performance. On the other hand,

investors seem to prefer smooth income for many reasons. For instance, Graham

et al. (2005) find that management believe that investors perceive firms with smooth

income as less risky in comparison to those with variable income. Francis et al.

(2004) find that investors reward such firms with lower costs of capital. Ball (2006)

points out that smooth income is preferable for earnings prediction. With its big in-

centives, income smoothing is generally considered to be common business practice

worldwide.

3.2.2 International Financial Reporting Standards and earnings man-

agement

As discussed in Chapter 1, a large body of research has investigated the effect of

IFRS on earnings management in many countries. While a number of previous stud-

ies focus on accrual earnings management after the IFRS adoption (Van Tendeloo

and Vanstraelen, 2005; Callao and Jarne, 2010; Zéghal et al., 2011; Houqe et al.,

2012), some test income smoothing. For instance, Barth et al. (2008) by comparing

earnings variation of firms worldwide – between the pre- and post-IAS periods and

between IAS firms and non-IAS firms, report that income smoothing declines after

with those of Barth et al. (2008), report a significant decline in income smoothing

in China. Hung and Subramanyam (2007) report an increase in income variability

of German firms after voluntary IAS adoption. In contrast, adopting IFRS in Eu-

rope shows different consequences. Chen et al. (2010) find an increase in income

smoothing of European firms after compliance with IFRS. Ahmed et al. (2013) re-

port a rise in income smoothing worldwide by comparing firms in IFRS adopting

countries and those in non-IFRS countries. Capkun et al. (2013) find an increase

in income smoothing for both voluntary and mandatory IFRS adopters worldwide.

However, smoothing methods have been little investigated. Note that the majority

of these prior studies estimated a group variance of net income as a proxy for income

smoothing. So they could only employ a univariate test in order to investigate the

effect of IFRS.

Though accounting standards adopted by firms are considered of high quality,

other incentives also play an important role in determining the quality of account-

ing information (Ball et al., 2003). So if the income-smoothing incentives discussed

earlier still remain, management may use real activity manipulation to smooth in-

come instead. Ewert and Wagenhofer (2005) theoretically propose that restricting

accounting standards may lead to the use of real manipulation. Empirical evidence

has also been documented. For instance, Tan and Jamal (2006), based on results

from their experimental study, report that tightening accounting allowances leads

to a drop in accrual manipulation but a manager who has a clear picture of a firm’s

future earnings is still able to engage in real activity manipulation to smooth earn-

ings. Ipino and Parbonetti (2011) investigating both discretionary accruals and real

activity manipulation, find that adopting IFRS leads to an increase in overall real

manipulation, especially for firms in strong legal enforcement countries.

Given that management can employ both accrual and real activity manipula-

tion and if IFRS may directly affect accounting choices and allowances, a decline

in income smoothing after the adoption found in some prior research may be possi-

while real manipulation remains, or 2) the magnitude of decrease in accrual manipu-

lation is more than the degree of real earnings management increases. Nevertheless,

the relation between income smoothing and the methods used to reduce earnings

volatility around the IFRS adoption period has been less documented.