Income smoothing refers to the practice of a company manipulating its financial statements to present a more stable and consistent level of earnings over time. This widely-documented practice has conflicting impacts on companies’ profitability in the short and long run. This paper investigates the effect of income smoothing on the profitability of a sample of 30 publicly-listed companies in the Palestine Exchange (PEX). The fundamental financial statement data covering the period from 2010 to December 2019 has been analyzed. A causal relationship has been estimated and tested, where profitability is estimated using the return on equity (ROE). Income smoothing is measured using the Eckel model (1981). Using panel regression analysis, the results indicate that income smoothing has a positive and significant impact on the profitability of the sample companies. This indicates that companies are inclined towards smoothing their income upward as their profitability metrics respond positively to the smoothing behavior. Additionally, the results confirm that investors in Palestine follow these accounting-based profitability measures to make their investment decisions. The positive impact of income smoothing can be traced to the trust factor and lower earnings volatility. Income smoothing can also serve as a mechanism to help companies weather economic downturns by diluting the impact of adverse events over a more extended period of time.

Title

Springer, Cham.

Publisher

Springer nature

Publisher Country

Switzerland

Indexing

Scopus

Impact Factor

None

Publication Type

Online only

Volume

528

Year

2024

Pages

8