Income Smoothing, Real Earnings Management and Long-Run Stock Returns

Using the Tucker-Zarowin (TZ) statistic of income smoothing, we find firms with higher income smoothing rankings exhibit lower long-run return and abnormal return. Also, we find similar results on firms that manage its earnings to meet zero earnings threshold. To test for the combined explanatory power of our independent variables (B, size, book to market ratio and smoothing (earnings managing to avoid losses) proxy), we estimate a multivariate regression. Multivariate analysis confirms our previous findings.