Income smoothing in banks and insurance companies and its impact on earnings per share – evidence from Jordan

Leqaa Al-Othman

doi:10.21511/bbs.14(4).2019.12

Abstract

This study aims to determine the existence of practices of income smoothing in banks and insurance companies in Jordan. Also, it focuses the to determining the impact of the income smoothing on earning per share (EPS). The study covered all the companies in the study population, which are 38 companies – 15 banks and 23 insurance companies listed on the Amman Stock Exchange (ASE). The results show that income smoothing is practiced by Jordanian banks and insurance companies. The number (and percentage) of insurance companies that practiced income smoothing is greater than the number of banks: 34.8% of insurance companies and 20% of banks practiced income smoothing. The results also clearly indicate that financial institutions, which practice smoothing, have a higher EPS compared to those that do not practice income smoothing; this also indicates that the most important goal of using income smoothing is to maintain a positive earnings level.

Highlights

Accounting earnings are the most important part that any user can observe in financial statements and it is considered as an index of company’s performance, according to shareholders’ and investors’ interests
Where IS – Income Smoothing Index, CV·ΔE – co- After collecting necessary data about the banks efficient of variation in earnings, and CV·ΔS – co- and insurance companies on the Amman Stock Exchange (ASE), normal disefficient of variation in sales. (Coefficient of varia- tribution was assessed, and the study hypothtion: ratio of the standard deviation to the Mean). eses were tested as follows
This study aims to provide practical evidence on the extent to which Jordanian banks and insurance companies practice income smoothing behavior

Summary

Introduction

Accounting earnings are the most important part that any user can observe in financial statements and it is considered as an index of company’s performance, according to shareholders’ and investors’ interests. The volatility of these earnings can lead to the losses for investors based on the belief that income volatility increases risk and that companies with less volatile income are less risky and attractive to investments. Aflatooni and Nikbakht (2010) showed that investors are attracted to companies that have a smooth income rather than those that have a fluctuating income. Managers have an incentive to report smooth earnings to create the impression of a less risky earnings stream”. Managers do their best to reach a target level of earnings and make these earnings stable to reduce risk by accounting methods called income smoothing. The flexibility available to the management when choosing accounting measurements and classification of certain revenues and expenses has contributed to the spread of the phenomenon of income smoothing; this means that companies can report a certain amount of income over time (Khoury & Shakhatreh, 2014)

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