이익유연화가 주식시장에서의 시장유동성 및 주가급락위험에 미치는 영향

This study examines the effect of income smoothing on market liquidity and stock price crash risk. According to Beidleman (1973), income smoothing defined as the intentional dampening the fluctuations of firms’ earnings realizations. There is mixed evidence on the impact of income smoothing in capital market. In a positive view of income smoothing, managers smooth earnings to convey firm’s private information on future performance to external investors. And income smoothing could improve the predictability of reported earnings by reducing earnings volatility and uncertainty of future earnings estimation. In other words, income smoothing reduces the risk perception of investors and contributes to the capital market efficiency. However, despite these benefits of income smoothing, if income smoothing is utilized for managers’ own benefits, it would cause negative impact on capital market. Thus, the evaluation of capital market on income smoothing depends on the magnitude of beneficial and detrimental effects of income smoothing. We focused on the detrimental effects of income smoothing. Graham, Harvey, and Rajgopal (2005) report that an overwhelming 96.9% of the survey respondents prefer smooth earnings to volatile earnings. Moreover, surprisingly 78% of respondents reveal that they would give up a small, moderate or large amount of value to report smoother earnings path. Previous studies provide some evidence about such negative effects of income smoothing. An increase in earnings smoothing is linked to an increase in cost of equity and an increase in information asymmetry (Bhattacharya, Daouk, & Welker, 2003; Bandyopadhyay, Huang, & Wirjanto, 2011). Eventually, it is likely to be reduced firm value due to the income smoothing. These studies regard income smoothing as opportunistic earnings management garbling earnings quality. Opportunistic earnings management to achieve a smoother earnings path offsets the benefits of income smoothing. And our proxies of market liquidity and crash risk are captures well the negative effects of income smoothing in capital market. Thus we hypothesize that income smoothing decreases market liquidity and increases stock price crash risk. The sample consists of 11,611 non-banking firm-years with December fiscal year end that are traded over korea Exchange from 2000 to 2013. In this study, we proxy for income smoothing with two measures following Tucker and Zarowin (2006) and Leuz, Nanda, and Wysocki (2003) for comparison purpose. We use the volume, Amihud’s (2002) price impact and the frequency of zero daily returns as the market liquidity substitute. And we adopt three different stock price crash risk measures using firm-specific weekly returns: (ⅰ) the negative coefficient of skewness of firm-specific weekly returns, (ⅱ) the down-to-up volatility of firm-specific weekly returns, and (ⅲ) the indicator variable that equals one if a firm experiences one or more crash weeks during the fiscal year period. We find that the level of income smoothing is positively associate with market liquidity and negatively associate with stock price crash risk. This indicates that market participants evaluate unfavorably income smoothing. This finding is robust after clustering adjustment by firm. The results in this study improve our understanding of economic consequences of income smoothing with respect to market liquidity and stock price crash risk. And investors should be aware of the effect of income smoothing and the motivation of income smoothing.