Income Smoothing and the Cost of Debt
Copyright policy )Income Smoothing and the Cost of Debt
AbstractThe literature on income smoothing focuses on the effect of earnings smoothing on the equity market. This paper investigates the effect of income smoothing on the debt market. Using the Tucker–Zarowin (TZ) statistic of income smoothing, we find that firms with higher income smoothing rankings exhibit lower cost of debt, suggesting that the information signaling effect of income smoothing dominates the garbling effect. We also find that the effect of earnings smoothing on debt cost reduction is stronger in firms with more opaque information and greater distress risk.
- University of North Carolina at Chapel Hill United States
- University of North Carolina Wilmington United States
- Wilfrid Laurier University Canada
Income smoothing, Cost of debt, G-12, ddc:650, HF5601-5689, Garbling, Credit spreads, Accounting. Bookkeeping, Credit ratings, Earnings smoothing, G-32
Income smoothing, Cost of debt, G-12, ddc:650, HF5601-5689, Garbling, Credit spreads, Accounting. Bookkeeping, Credit ratings, Earnings smoothing, G-32
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