The smoothing of income numbers: Some empirical evidence on systematic differences among management-controlled and owner-controlled firms

Abstract

An examination of the effects of the separation of ownership and control on income smoothing is conducted under the hypothesis that management-controlled firms are more likely to be engaged in smoothing as a manifestation of managerial discretion and budgetary slack. Both "Accounting" and "Real" smoothing are tested by observing the behavior of discretionary expenses vis-à-vis the behavior of income numbers. The results confirm that a majority of firms behave as if they were income smoothers. A particularly strong majority is included among management-controlled firms with high barrier to entry.