Earnings Smoothing and Strategic Change

Abstract

To understand a firm's strategy we must understand when they will engage in strategic change vs. persist with current activities. A precursor of strategic change that is often studied is performance feedback; it is often found that higher levels of performance (particularly above salient historical, social, or natural aspiration levels) is associated with lower levels of subsequent strategic change. However, studies of performance often use reported accounting earnings as a measure of performance and there is reason to believe that managers actively manage reported earnings through accounting and operational choices (such as to smooth earnings). This study examines the relationship between earnings smoothing and strategic change and presents evidence suggesting that this relationship is not mediated through performance feedback and shortfalls below aspirational benchmarks.