Income Smoothing and Market Perception of Accounting Numbers: An Empirical Investigation of Extraordinary Items

Wan Adibah Wan Ismail (Universiti Teknologi MARA)
Khairul Anuar Kamarudin (Universiti Teknologi MARA)
Muhd Kamil Ibrahim (Universiti Teknologi MARA)

Journal of Financial Reporting and Accounting

ISSN: 1985-2517

Publication date: 6 January 2005

Abstract

This paper examines issues related to the reporting of extraordinary items in the financial statements of Malaysian companies. The first issue concerns the change of accounting standards on extraordinary items, which has limited the scope of extraordinary items. It is found that there are significant changes on the incidence of reported extraordinary items during the period after the adoption of the new standard. The findings supported the argument that the new standards on extraordinary items had consequently reduce significantly these items from financial statements. This paper hypothesizes that extraordinary items classification choice is a means used by companies to smooth income. Two types of statistical tests performed have confirmed the proposition that the disclosure of extraordinary items is subject to this type of manipulation during the period before the adoption of the new standard. Although it is proved that the broad definition of extraordinary items allows companies to manipulate income, evidence gathered from multivariate regressions demonstrates that extraordinary items are of value‐relevance for investors in valuing a firm’s equity. Thus, investors take into account the extraordinary items even though it is disclosed “below the line”.

Keywords

Citation

Adibah Wan Ismail, W., Anuar Kamarudin, K. and Kamil Ibrahim, M. (2005), "Income Smoothing and Market Perception of Accounting Numbers: An Empirical Investigation of Extraordinary Items", Journal of Financial Reporting and Accounting, Vol. 3 No. 1, pp. 49-70. https://doi.org/10.1108/19852510580000337

Download as .RIS

Publisher

:

Emerald Group Publishing Limited

Copyright © 2005, Emerald Group Publishing Limited

To read the full version of this content please select one of the options below

You may be able to access this content by logging in via Shibboleth, Open Athens or with your Emerald account.
To rent this content from Deepdyve, please click the button.
If you think you should have access to this content, click the button to contact our support team.