Does income smoothing improve earnings informativeness? – a comparison between the US and China markets

Abstract

Tucker and Zarowin (2006) examine the impact of income smoothing on earnings informativeness, as proxied by the future earnings response coefficient (FERC). In this paper, we replicate Tucker and Zarowin (2006) and compare the results between the US and China markets. Specifically, using a sample of US firms from 2003 to 2008, we first find results consistent with Tucker and Zarowin (2006) that income smoothing improves FERC. However, our analysis for the China market over the same sample period indicates that income smoothing has little impact on FERC. Within the China market, we further find that income smoothing does not affect FERC for state-owned enterprises (SOEs) but weakly affects FERC for non-state-owned enterprises (non-SOEs). We argue that the market-level differences in information environment partly account for the differential impacts of income smoothing on FERC.