The Contracting Role of Income Smoothing: Evidence of European Private Firms
|Speaker:||Joachim Gassen , Humboldt University, Berlin|
|Date:||Friday 3 December 2010|
|Location:||Xfi Seminar Room A|
We investigate the impact of contracting incentives on the smoothness of earnings reported by European private firms and how heterogeneous governance infrastructures across Europe moderate this relation. Most European private firms can be defined as owner-manager run enterprises with private debt providers as central outside stakeholders. We expect for this setting the smoothness of earnings to be positively related to the relative importance of debt contracts in equilibrium. Also, we expect this relation to be more pronounced in governance regimes where debt renegotiation is more costly. Finally, we expect that firms in countries with a strong link between financial and tax accounting report smoother earnings streams. Our large sample empirical evidence confirms our expectations. Our findings are consistent with the accounting of European private firms being shaped by heterogeneous contracting incentives and thus speak to the current debate about harmonizing the accounting standards for European private firms.
Keywords: income smoothing, debt contracting, financial accounting objectives, accounting incentives, earnings attributes, Europe, private firms, corporate governance