important to standard setters and regulators, as it highlights the need for an effective regulation for
detecting income smoothing. There is a strong need to have well-dened policies and regulatory
mechanism with respect to prevent and detect income manipulation practices at an early stage.
Standard-setting bodies can consider the attributes of assets and liabilities and changes in them also
with the fundamental process of measurement of income. In short, the evidence argues for a revenue/
expense and asset/liability view of earnings, rather than the cash-ow view of earnings. The ndings of
this study are important to policymakers and other stakeholders, as it highlights the need for an
effective board in discharging their role qualitatively, rather than quantitatively.
Social implications – It brings out the importance of fair accounting for shareholders.
Originality/value – It is an original paper which highlights the income smoothing behaviour in
Indian corporate enterprises in terms of growth opportunities available to them.
Keywords Performance, Growth, Discretionary accruals, Income smoothing,
Investment opportunity set
Paper type Research paper
Income smoothing is a form of earnings management and is generally dened as the
dampening of uctuations in reported earnings over time (Ronen and Yaari 2008, p. 317).
In other words, management is inclined to take actions to increase earnings when
earnings are relatively low and to decrease earnings when earnings are relatively high.
The main reason that managers smooth earnings is “maximizing their own wealth”.
Goel’s (2012) study evaluates the implications of discretionary accruals for earnings
management in the Indian corporate enterprises. His analysis indicates that there is
presence of accrual management in the units.
When making discretionary accounting choices managers consider expected future
earnings (Fudenberg and Tirole, 1995, p. 77). Analytical results by Fudenberg and
Tirole (1995) propose that job security concern creates an incentive for managers to
smooth earnings in consideration of both current and future relative performance. There
is a support for this job security and anticipatory income smoothing theory.
Ahmed et al. (2000) provided more direct test to this effect. He hypothesized that the
extent of smoothing would vary directly with managers’ job security concerns as
proxied by the degree of competition in rms’ product markets, product durality and
capital intensity. Their results show that managers of rms in more competitive
industries and durable goods engage to a greater extent in income smoothing.
So, there is a relationship that exists between “investment opportunity set or growth
opportunities” and anticipatory income smoothing by managers.
Managers of rms with lower growth opportunities as measured by the investment
opportunity set (IOS) are likely to have greater job security concerns than managers of other
rms. A greater extent of income smoothing is expected from managers of such rms. So,
when current earnings are “poor” and expected future earnings are “good”, managers of
rms with lower growth opportunities resort to income-increasing accruals and vice versa.
India witnessed two large corporate scams, namely, Satyam and Kingsher in 2009
and 2012, respectively. It not only led to nancial loss for the shareholders but also
disturbed the status quo of the entire nancial system. Incidence of any such scam
questions the effectiveness of governance framework and quality of income. It requires
a change in the regulatory regime. India had its transformation process in the form of
new Companies Act, 2013 after a gap of 57 years since old Companies Act, 1956. This