Effects of Income Smoothing Practices on the Conservatism of Public Companies Listed on the BM&FBOVESPA

Revista Contabilidade & Finanças, v. 23, n. 58, São Paulo, Jan./Apr., 2012. doi.org/10.1590/S1519-70772012000100005

Posted: 18 Jul 2012 Last revised: 7 Feb 2015

See all articles by Jose Elias Feres de Almeida

Jose Elias Feres de Almeida

Federal University of Espirito Santo (UFES)

Alfredo Sarlo Neto

Federal University of Espírito Santo

Ricardo Furieri Bastianello

UNB; Universidade Federal do Espirito Santo

Eduardo Moneque

affiliation not provided to SSRN

Date Written: January 6, 2011

Abstract

The aim of this study was to investigate two aspects of accounting information that may be inherently related: income smoothing practices and conditional conservatism. Theoretically, the more a firm employs income smoothing, i.e., uses accruals to reduce the variability of profits, the less possibility there is for the timely acknowledgement of future economic losses (i.e., bad economic news) in profits. Eckel's model (1981) was used in this study to classify listed companies as smoothing or non-smoothing, and Basu's model (1997) was used to quantify the degree of conditional conservatism present in each firm. To make the results more robust, samples were created with annual stock return data from both March and December. The results indicated that non-smoothing firms had a higher degree of conditional conservatism, i.e., more opportunity to recognize future economic losses because the market could use the stock return data to anticipate future losses contained in the information regarding profits. This research made it possible to observe theoretical relationships between properties of accounting information: i) there is a relationship between income smoothing and conditional conservatism (i.e., accounting choices); ii) the informational environment of the Brazilian capital market contributes to the market distinction between smoothing and non-smoothing firms; and iii) the improvement of the capital market provides economic operators with greater insight into economic losses that are contained in accounting results.

Keywords: Conditional Conservatism, Income Smoothing, Accounting Information, Capital Markets

JEL Classification: G10, M40, M41, M49

Suggested Citation

Almeida, Jose Elias Feres de and Sarlo Neto, Alfredo and Bastianello, Ricardo Furieri and Moneque, Eduardo, Effects of Income Smoothing Practices on the Conservatism of Public Companies Listed on the BM&FBOVESPA (January 6, 2011). Revista Contabilidade & Finanças, v. 23, n. 58, São Paulo, Jan./Apr., 2012. doi.org/10.1590/S1519-70772012000100005 , Available at SSRN: https://ssrn.com/abstract=2111229

Jose Elias Feres de Almeida (Contact Author)

Federal University of Espirito Santo (UFES) ( email )

Av. Fernando Ferrari, n. 514, Goiabeiras
Centro de Ciências Jurídicas e Econômicas
Vitoria, Espírito Santo 29075-910
Brazil
+5527992248737 (Phone)

Alfredo Sarlo Neto

Federal University of Espírito Santo ( email )

Av. Fernando Ferrari
No. 514, Goiabeiras
Vitória
Brazil

Ricardo Furieri Bastianello

UNB ( email )

Campus Universitário Darcy Ribeiro
Asa Norte
Brasília, Distrito Federal 70910-900
Brazil

Universidade Federal do Espirito Santo ( email )

Vitórioa
Brazil

Eduardo Moneque

affiliation not provided to SSRN ( email )

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