Earnings Smoothing and Earnings Predictability

This paper studies the relationship between earnings smoothing and earnings predictability and also between earnings smoothing and earnings persistence. Using Tucker and Zarowin (TZ) income smoothing statistic and variance of changes in earnings and also using the simulation and bootstrapping methods, this paper studies the income smoothing behavior, earnings persistence and earnings predictability in Tehran Stock Exchange (TSE) from 2002 to the end of 2007. The analysis of the relationship between earnings smoothing and earnings predictability (earnings persistence) relies on commonly used autoregressive regressions of current on one-year lagged earnings. Consistent with existing literature, results indicate widely held managerial beliefs that smoothing earnings increases the earnings predictability and earnings persistence.