INCOME SMOOTHING BY ECONOMY SECTOR

The practice of income smoothing is thought to be widespread, although evidence in support of deliberate management manipulations is inconclusive. An analysis focusing on artificial income smoothing by comparing the variability of income to the variability of sales indicates that artificial income smoothing occurs if income is less variable. Although Belkaoui and Picur (1984) hypothesize that periphery-sector firms have both greater incentive and greater opportunity to smooth income than firms in the core sector of the economy, no difference is found in the incidence of smoothing between these sectors when sector is the only explanatory variable. However, if firm size and investor scrutiny are added as explanatory variables, there is a difference in smoothing between economic sectors for different sized firms. Among large firms, this pattern is reversed. Income smoothing is found to occur at all levels of the US economy.