INVESTIGATING INCOME SMOOTHING: EMPIRICAL EVIDENCE FROM SERBIAN’S HOTEL COMPANIES

Abstract

The flexibility in accounting standards and principles, lead to incentives for managers to show a good picture of the companies. It is logical and rational for managers to attempt to smooth income by using certain accounting devices to reduce the companies’ income fluctuation over time to improve relations with creditors, investors, and employees. Income smoothing enables companies to stabilize earnings and thereby increase earnings predictability. For detecting income smoothing through examining the financial statements Eckel’s (1981) approach (income variability approach) has been the most popular and most used one. In this research study, we use a selection criterion between smoothers and non-smoothers hotel companies based on the income smoothing. This study aims to classify Serbian hotel companies during the period 2016-2019 as smoothing and non-smoothing hotel companies. The method used to determine the presence or absence of income smoothing and the company value results is based on the coefficient of variation model proposed by Eckel (1981). According to the coefficient of variation method, the more the income smoothing (IS) index tends to zero, the more smoothed out the company’s earnings are. This study examines the presence of artificial income smoothing in 22 Serbian hotel companies. A binomial test is used to test the hypothesis. As a result of research, there are no significant statistical indicators of income smoothing practices in Serbian hotel companies during the period 2016-2019.