Authors: Nikolaos Karampinis, Giannis Lessis, Dimitrios Ntounis, Orestis Vlismas

Title: Real Earnings Smoothing and Asymmetric Cost Behaviour

Abstract

This study explores the relationship between real earnings smoothing and asymmetric cost behaviour. Our sample consists of 77,303 firm-year observations in 30 countries over the period 2005-2019. Our empirical evidence indicates that real earnings smoothing and cost asymmetry are positively related; however, in the case of a sales revenue decline, a higher level of cost stickiness reduces the intensity of real earnings smoothing. Additional analysis supports the generalization of the findings including country-specific characteristics, such as each country’s legal system, tax rates, credit ratings, and macroeconomic conditions. Robustness tests reveal that our main empirical findings are robust to (a) alternative measures of the intensity of cost stickiness or real earnings management, (b) the effects of cost asymmetry on real earnings management, and (c) the presence of accrual earnings smoothing. Finally, we justify that the presence of managerial incentives to meet (small) earnings targets narrows the statistical significance of the relation of real earnings smoothing and cost asymmetry due to reduced managerial incentives to retain idle resources after a sales revenue decline.