Abstract
Income smoothing refers to the use of accounting techniques to level out net income fluctuations from one period to the next. Companies indulge in this practice to manipulate the earnings over the period in order to lower the level of uncertainty. The companies with constant earnings attract more investors as they are willing to pay more prices for company’s stock. This study examine the presence of artificial income smoothing in 64 Shari‘ah compliant companies listed in the financial market of Pakistan for the period 2008-2015. The study also takes into consideration the concept of income smoothing from an Islamic perspective. To achieve the study’sobjectives, Eckel’s index model is used. The study found that 34 percent of the companies are non-smoothers and 66 percent of the companies are smoothers in pooled sample. Among high market capitalized 32 companies, 37.5 percent of the companies are non-smoothers and 62.5 percent are smoothing companies. In 32 low market capitalized companies, 31 percent companies are non- smoothing and 69 percent companies are practicing income smoothing
Highlights
Organizations have to disclose their earnings for conniving financial position to the investors for making an effective investment decision
McNichols and Stubben 2 argued that Generally Accepted Accounting Principles (GAAP) authorizes a certain degree of administrative discretion in accounting approaches application
This study addresses the following research questions: 1. Is income smoothing practices being observed in Shari‘ah compliant companies of Pakistan?
Summary
Organizations have to disclose their earnings for conniving financial position to the investors for making an effective investment decision. Income smoothing defines as the “estimation of net revenue that an organization earns over a specific period.” It encourages to store or reduce earnings during the performing years in order to defer them for future use during the down turn years of the entity.. It encourages to store or reduce earnings during the performing years in order to defer them for future use during the down turn years of the entity.4 This results in the elimination of earning fluctuations over the period. It helps to save the future of the organization along with making them aware of the present position in the financial market
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