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Analysis and diagnosis of income smoothing in Spain

Author: Gill de Albornoz B.   Alcarria José J.  

Publisher: Routledge Ltd

ISSN: 1468-4497

Source: European Accounting Review, Vol.12, Iss.3, 2003-09, pp. : 443-463

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Abstract

This paper examines income smoothing behaviour for a sample of Spanish listed companies over the period 1991-97. Discretionary accruals are used as a measure of managers' accounting discretion. Our results strongly support the income smoothing hypothesis which predicts aggressive (conservative) accounting policies when a firm's current pre-managed performance undershoots (exceeds) target earnings, as proxied by median earnings for the firm's industry. Consistent with DeFond and Park (1997) , we also provide some evidence supporting the anticipatory income smoothing hypothesis, whereby current period smoothing behaviour is partly conditioned on expected future performance.