عدم قطعیت محیطی و قیمت گذاری بازار از یکنواختی درآمد

Environmental uncertainty induces variability in an organization's reported earnings, and accentuates the information asymmetry between its managers and outside stakeholders. Managers operating in an environment of high uncertainty, therefore, have an incentive to reduce such variability by smoothing income numbers. We investigate the stock market response to earnings smoothness for firms operating in an environment of high uncertainty. We measure income smoothing by the negative correlation of a firm's change in discretionary accruals with its change in pre-managed earnings as per Tucker and Zarowin (2006). Using future earnings response coefficient (FERC) methodology to measure the informativeness of smoothed earnings, and two measures of environmental uncertainty, this paper documents that current stock price incorporates more information about future earnings for firms operating in high uncertain environments, thus supporting the informational value view of income smoothing.

The purpose of this paper is to investigate the stock market response to earnings smoothness for firms operating in an environment of high uncertainty. A sizable volume of academic literature has documented the managerial propensity to smooth earnings (Buckmaster, 2001). Earnings smoothing is a special case of earnings management where managers smooth out inter-temporal volatility in reported earnings to deliver a stable earnings stream (Biedleman, 1973). Fudenberg and Tirole (1995) defined income smoothing as “the process of manipulating the time profile of earnings or earnings reports to make the reported income stream less variable, while not increasing reported earnings over the long run”. Income smoothing is pervasive, as documented by Graham, Harvey and Rajgopal's (2005) survey of Chief Financial Officers. An overwhelming majority of the survey respondents prefer smooth earnings; and, more importantly, about 78% of the respondents would give up economic value in exchange for smooth earnings (Graham et al., 2005, 5). Smoothed earnings are perceived as being less risky by investors, and earnings prediction is perceived as easier when current and immediate past reported earnings are smoothed. Stock market reaction to smoothing naturally has been a matter of academic interest. There are two competing hypotheses regarding management's motives for earnings smoothness. On one hand, managers arguably use income smoothing to make public their private information about the firm's future earnings (Chaney and Lewis, 1995, Ronen and Sadan, 1981 and Tucker and Zarowin, 2006). The rationale for such an exercise is that increased volatility associated with unsmoothed earnings increases the potential loss suffered by the uninformed traders (when they trade for liquidity reasons). Chaney and Lewis (1995), therefore, argued that smoothing of earnings for this purpose will lead to a higher earnings response coefficient, which is empirically supported by Hunt, Moyer, and Shevlin (2000). Tucker and Zarowin (2006) similarly argued that income smoothing impounds future (private) information into contemporaneous returns. Others argue management's motives for income smoothing are non-normative; that is, managers smooth income in an attempt to garble earnings for private benefit. Healy (1985) provided evidence of smoothing as a function of managerial compensation schemes; and, Fudenberg and Tirole (1995) modeled income smoothing as a function of managerial job security concerns. DeFond and Park (1997) indirectly tested the motivation proposed by Fudenberg and Tirole (1995) and provided evidence that managers of firms experiencing poor (good) performance in the current period and expected good (poor) performance in the next period deploy income-increasing (income-decreasing) discretionary accruals respectively in order to reduce job security concerns. Empirical evidence from Subramanyam (1996),Hunt et al., 2000 and Tucker and Zarowin, 2006 supported the informational over garbling view of smoothing by documenting a positive association between current stock returns and smoothed earnings. It is, however, not clear ex ante whether all firms engaging in earnings smoothing enjoy the same benefit. One of the contextual factors that could result in cross-sectional differences in the market reaction to earnings smoothness is the environmental uncertainty defined as “the unpredictability of the actions of customers, suppliers, competitors and regulatory groups” (Govindarajan, 1984). High environmental uncertainty increases the risk of accurately assessing future earnings and provides incentives for managers to use reporting discretion in reducing the variability to provide a more predictable earnings stream (Ghosh & Olsen, 2008). Although there is a considerable volume of research on the effect of environmental uncertainty on management control system designs in the management accounting literature (see Chenhall, 2003 for a review), there is little, in the financial reporting area. Ghosh and Olsen (2008) conducted an empirical investigation of the effect of environmental uncertainty on management reporting choices to external stakeholders. They found evidence that managers attempt to reduce the additional variability imposed by the high uncertain environment via discretionary accrual policies. Although Ghosh and Olsen (2008) examined the effect of environmental uncertainty on firms' reporting choices, they did not investigate market response to such earnings smoothness. Motivated by their call for additional research on this issue, we test for the market response to earnings smoothness in the context of uncertain business environment. We hypothesize that smoothed future earnings will be more strongly related with contemporaneous returns in a high uncertain environment based on an information asymmetry argument developed in the next section. Using a sample of US listed firms from 1988 to 2006, and employing the future earnings response-based regression method, we find that environmental uncertainty plays an important role in the valuation of earnings smoothness. Two indicators are used to capture environmental uncertainty, namely, the sales variability and the dispersion of financial analysts' earnings forecasts. Both these environmental uncertainty proxies reveal that the three way interactions among income smoothing, environmental uncertainty and future earnings are positive vis-à-vis current stock returns, supporting the conjecture that smoothed earnings are more informative about future earnings for firms operating in an environment of high uncertainty. These results remain robust to the inclusion of certain firm-specific control variables. This paper contributes to the earnings smoothing literature by documenting a particular context where income smoothing is likely to be beneficial. Prior research provides general evidence on the market valuation of earnings smoothness (Michelson et al., 1995 and Michelson et al., 2000). By contrast, this study takes a step forward and identifies environmental uncertainty as an important contextual variable which encourages managers to engage in earnings smoothing. The paper proceeds as follows. The next section outlines the theoretical underpinnings of the rationale for, and the market assessment of, earnings smoothness in the context of the environmental uncertainty. Section 3 explains the research design issues. The following section describes the sample selection procedure and provides the test results. The final section concludes.

The evidence is mixed as to whether smoothed income provides more informative earnings or garbles the reported earnings. Tucker and Zarowin (2006) provide strong evidence that the association between current returns and future earnings is positive when earnings are smoothed. Whether this positive association is extended to firms operating in high uncertain environments has not been explored. Firms operating in high uncertain environments suffer from an acute information asymmetry problem which discourages uninformed traders from trading with the informed traders. To remedy this situation, managers find it beneficial to engage in income smoothing, which portrays a stable earnings stream and allows outsiders to make an accurate forecast about future payoffs. This information provision view supports a positive association between current stock returns and future earnings of smoothers operating in higher uncertain environments. This paper presents evidence consistent with such a prediction. The three-way-interaction between income smoothing, future earnings and an environmental uncertainty proxy is found to be positive and statistically significant after controlling for a number of firm-specific variables. This finding also lends indirect support to the survey evidence provided by Graham et al. (2005), where an overwhelming majority of the respondents favor a smoothed earnings stream, presumably because they expect a positive capital market pricing effect of such earnings smoothness. From a policy perspective, regulators should take environmental uncertainty into consideration as a contextual rationale for smoothing, before taking regulatory actions against earnings smoothers. The results are subject to the usual caveats of measurement error associated with income smoothing and environmental uncertainty. Because measurement of income smoothing and the calculation of FERC parameters required firms to have at least nine consecutive years of data, survivorship bias remains a concern in the study.