Long-run abnormal returns and income smoothing in the Spanish stock market

Abstract

This study investigates the market valuation of income smoothing via a long-run analysis of the relationship between income smoothing and return and risk in the Spanish stock market. The results suggest that firms that smooth income appear to yield higher stock returns than firms that do not; they also appear to carry a lower risk associated with size and book-to-market factors. The study concludes that the Spanish market is not efficient in this question because it overvalues firms that artificially smooth income, and because it is possible to reduce the stock's risk by manipulating accounting profits.