Institutional Ownership, Business Cycles and Earnings Informativeness of Income Smoothing: Evidence from Iran

Managers engage in income smoothing either to communicate private information about future earnings to investors (informativeness hypothesis) or to distort financial performance for opportunistic purposes (opportunism hypothesis). Business cycles and the monitoring role of institutional ownership may affect the earnings informativeness of income smoothing. The purpose of this research is to examine the effect of business cycles and institutional ownership on the earnings informativeness of income smoothing. 140 firms listed on the Tehran Stock Exchange are selected as the sample over the period 2010-2016. The results showed that, during recession, income smoothing does not effectively communicate information about future earnings and thus earnings are less informative. Moreover, higher levels of institutional ownership are associated with a decrease in their monitoring role and decrease in the earnings informativeness of income smoothing. Finally, the results suggested that the relationship between institutional ownership and the earnings informativeness of income smoothing is not significantly affected by business cycles.