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臺大管理論叢
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4
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Table 1 Sample Selection
Descriptions
N
Firms listed on TEJ during 1997~2007 (Exclude finance-related institutions)
14,437
Less:
Firm in diversified industrial (Code No.99)
(679)
Firms belonged to regulated industry (Code No.97)
(131)
Industries with less than ten firm-year observation
(241)
Firms’ data unavailable for calculating income smoothing
(5,588)
Firms’ data unavailable for QFII variables
1,188
Firms’ data unavailability for other control variables
(844)
Final empirical samples
5,766
3.2 Variables Measurement
Dependent Variable:
Stock Return (R):
The quality of earnings information helps users to increase the likelihood of correctly
forecasting the outcome of past or present events (SFAC No.2). If income smoothing
improves earnings informativeness, stock prices impound more information about future
earnings (Tucker and Zarowin, 2006). This study follows Collins, Kothari, Shanken, and
Sloan (1994), Lundholm and Myers (2002) as well as Tucker and Zarowin (2006), and uses
ex-dividend annual stock return in year t (R
t
) as the dependent variable, subsequently
examines whether managerial income smoothing behavior embedded in the current stock
price reflects the information about future earnings.
Pivotal Explanatory Variables:
Income Smoothing Measure (IS):
To measure the income smoothing, this study follows the procedures suggested by
Tucker and Zarowin (2006). First, we estimated the discretionary accruals (DA) from the
cross-sectional modified Jones model of Kothari, Leone, and Wasley (2005). The pre-
discretionary income (NDE) is calculated by subtracting discretionary accruals (DA) from
net income. This study uses the current year and the observations of the past four years to
calculate the correlation between the change in discretionary accruals (ΔDA) and the change
in pre-discretionary income (ΔNDE). Second, we measure a firm’s reversed fractional
ranking of the correlation coefficient (between 0 and 1) within its industry-year and refer to
it as the income smoothing measure (IS). This measure implies that there is an underlying
pre-managed income series and that managers use discretionary accruals to make the