Income Smoothing Practices Among Listed Firms in Malaysia
The income-smoothing phenomenon is well documented in accounting and finance literature. Although the existence of income smoothing practices have been detected in varying degrees across different samples, many issues relating to the practices of creative earnings management remain unresolved to...
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| Format: | Thesis |
| Language: | English English |
| Published: |
2001
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| Subjects: | |
| Online Access: | http://psasir.upm.edu.my/id/eprint/9852/1/FEP_2001_12_IR.pdf |
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| Summary: | The income-smoothing phenomenon is well documented in accounting and finance
literature. Although the existence of income smoothing practices have been detected
in varying degrees across different samples, many issues relating to the practices of
creative earnings management remain unresolved to date. However, the real danger
is not that immoral management is busily engaged in these manipulative practices
but the eroded confidence in the usefulness of financial accounting statements. The
common issue of interest in previous income smoothing studies was the
methodology or model selection used to identify the income smoothing sample
fllll1s. Recent studies such as Albrect and Richardson (1990), Ashari et. al. (1994),
Michelson et. al. (1995), and Carlson and Bathala (1997) adopted the income
smoothing (IS) index model developed by Eckel (1981). This model is 'preferable'
than the classical expectancy model because it mitigates the use of predicted
earnings and the need to observe income smoothing behaviour over a long-term
period. However, this model is unable to directly estimate the extent or amount of smothers and the direct instruments for income smoothing in firms. In addition, it
heavily relies on several reasonable and general assumptions. Therefore, the mai
on
objective of this study is to verify the direct instruments used for income smoothing.
The discretionary accounting changes and start-up costs (pre-operating and
preliminary expenses) were observed and tested using the expectancy model to
ascertain the extent of smoothing behavior. A start-up sample of 231 firms from
the main and second board of the KLSE was analyzed for presence of smoothing
behavior using an IS index model and expectancy model over a nine-year period
(1990-1998). The analysis was divided into three different periods, from 1990 to
1996, from 1997 to 1998 and from 1990 to 1998 to isolate managerial behavior on
smoothing during the pre-economic crisis and crisis period. The results from both
models show higher percentage of smothers during the crisis period. This is
consistent with the expectation that managers have strong motivation to smooth
income during the economic crisis period to counter the fluctuation in reported
income. The finding also shows that the expectancy model is more appropriate to
identify income smoothing firms during the economic crisis period. The nonparametric
test was performed to determine the final sample of smoothing firms.
These sampled firms were further analyzed to determine the factors influencing
income smoothing practices. Nine explanatory variables were tested and only three
variables were found significant, namely, the profitability, debt financing and
management ownership factor. The profitability and debt-financing factor have a
negative relationship with income smoothing practices while the management
ownership has a positive relationship. This implies that the firm with higher profit
and greater level of debt has fewer tendencies to practice income smoothing. On the
other hand, the manager-controlled firms are more likely to smooth income in a favorable way. These results suggest that principal-agent relationship and the
profitability of a firm have strong impact on income smoothing behavior. |
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