The Impact of Environmental Uncertainty on Informativeness of Income Smoothing in Listed Companies in Tehran Stock Exchange (TSE)

Results of prior studies show that investors prefer to invest in firms which have a stable trend of profitability, and environmental uncertainty is one of the factors that causes earnings volatility. Therefore environmental uncertainty reinforces the motivation of managers to smooth earnings. Income smoothing is done with two incentives: managementʹs opportunistic incentives and disclosure of confidential information about future earnings. On this basis, the main purpose of this research is to investigate the impact of environmental uncertainty on informativeness of income smoothing. In fact, the main question research is whether income smoothing increases the informativeness of earnings in the conditions of high environmental uncertainty or it distorts the earnings information and misleads shareholders? In this research income smoothing is measured by negative correlation between changes in discretionary accruals and changes in pre-discretionary income, and environmental uncertainty is also calculated by coefficient of variation of sales and coefficient of variation of earnings before taxes in a sample of 103 firms in Listed Companies in Tehran Stock Exchange (TSE). Then the relationship between future earnings and current earnings and returns has been examined in the conditions of environmental uncertainty by income smoothing and environmental uncertainty scales in research models and choosing the best methods of the analysis of pooled data for the time period of 2003 to 2012. The results of using future earnings response coefficient (FERC) methodology shows that in the conditions of environmental uncertainty, income smoothing increases the FERC and earnings persistence, so it increases informativeness of the reported earnings.