Work

A Theory of Income Smoothing When Insiders Know More Than Outsiders

Year: 2015

Type: article

Abstract: We develop a theory of income and payout smoothing by firms when insiders know more about income than outside shareholders, but property rights ensure that outsiders can enforce a fair payout. Insiders set payout to meet outsiders' expectations and underproduce to manage future expectations downward. The observed income and payout process are smooth and adjust partially and over time in response to economic shocks. The smaller the inside ownership, the more severe underproduction is, resulting in an “outside equity Laffer curve.”

Source: Review of Financial Studies

DOI: 10.1093/rfs/hhv026

Authors: Viral V. Acharya, Bart M. Lambrecht

Institutions: Center for Economic and Policy Research, New York University, University of Cambridge, Centre for Economic Policy Research

Language: English

Topic: Corporate Finance and Governance

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W3123477136

FWCI: 13.32

Cites: 80

Cited by: 97

Related to: 10