Analysis of the Effect of Income Smoothing on Informative of Stock Prices

Managers of companies try to satisfy investors’ expectations through earnings management, and show profitability growth. Regarding the income smoothing motivation two hypotheses exist. According to the first hypothesis, management’s intention is distortion of information and the second hypothesis indicates that management’s intention is transferring and reporting their private information regarding future earnings. This study investigates the impact of income smoothing on stock price informative for firm performance evaluation. The Model that is used for hypothesis testing is Zarowin’s model (2002). Income smoothing is measured as (1) negative correlation between changes in accruals and changes in cash flows, and (2) the variation of net income relative to the variation in cash flows. We use 140 firms listed in Tehran stock exchange during a period of 1382-1386, as research sample. The results of study show, that firms with greater income smoothing have more informative stock prices about the firm’s future profitability and cash flows.