Risk Reporting and Earnings Smoothing: Signaling or Managerial Opportunism?

Hend Monjed, Salma Ibrahim*, Bjørn N. Jørgensen

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

Purpose: The purpose of this study is to examine the association between two reporting mechanisms used by managers to communicate risk information to the capital market: risk disclosure and earnings smoothing.
Design/methodology/approach: This study juxtaposes two competing hypotheses, the “opportunistic” and the “signaling”, and empirically investigates whether one dominates the other for a sample of large UK firms for the period 2005–2015. This study also uses the global financial crisis as an arguably exogenous shock on overall risk in the economy to investigate its effect on managers' joint use of textual risk disclosures and earnings smoothing.
Findings: This study finds that risk disclosure and earnings smoothing are negatively associated. This finding supports that managers with incentives to mask the firm’s true underlying risk through smoothing earnings provide lower levels of risk-related disclosures. This study documents that the trade-off between risk disclosure and earnings smoothing is more pronounced during the global financial crisis period than before and after the crisis period. Further, this study demonstrates a more negative association for firms with higher volatility of cash flows. This negative association is robust to various model specifications, additional corporate governance related controls and an alternative measure of earnings smoothing.
Originality/value: The findings provide new empirical evidence about the association between risk disclosure and earnings smoothing and support the opportunistic hypothesis, especially when firms are faced with increased risk.
Original languageEnglish
JournalReview of Accounting and Finance
Volume21
Issue number5
Pages (from-to)377-397
Number of pages21
ISSN1475-7702
DOIs
Publication statusPublished - 2022

Bibliographical note

Published online: 30. September 2022.

Keywords

  • Earnings smoothing
  • Content analysis
  • Agency theory
  • Signaling theory
  • Risk disclosure
  • Textual disclosures

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