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(2013) documented that institutional investors acquire significant positive (negative)
abnormal returns from the block trades of net buy (sell). Consequently, QFIIs’ trading
activities can provide credible signals to other investors and generate significant impacts on
market returns for large cap stocks (Lu, Fang, and Nieh, 2012; Lien et al., 2013). QFIIs’ role
is consistent with the informational advantage of sophisticated investors and continues to
play an important role in the Taiwan stock market. Meanwhile, it is likely that the majority of
QFIIs’ trading strategies in Taiwan can be classified as short-term oriented investing
behavior.
2.2 Related Research
Income smoothing can be denoted as the utilization of accounting discretion to reduce
earnings variability (Fudenberg and Tirole, 1995). In past years, the accounting community
has given the issue of income smoothing a high priority. For example, Graham, Harvey, and
Rajgopal (2005) documented that more than 96% of the respondents indicate that they prefer
a smooth earnings path, which is one of the most important factors for income smoothing.
Fudenberg and Tirole (1995) model managerial earnings management behavior and suggest
that concern of job security creates an incentive for managers to smooth earnings. The
implication from their theory suggests that when current earnings performance is poor,
managers have an incentive to shift future earnings into the current period in order to
decrease the possibility of dismissal. In this setting, managers borrow earnings from the
future to artificially embellish current earnings performance upward in difficult times. On the
other side, when current earnings are relatively high, managers may make accounting
choices effectively by saving current earnings for the possible use in the future. Empirical
studies (e.g., DeFond and Park, 1997) support the theoretical explanation of Fudenberg and
Tirole (1995). We note that the smoothed earnings may be more informative if the accrual-
based system better reflects fundamental performance than do other choices (Tucker and
Zarowin, 2006). In this informative school, Subramanyam (1996) finds that discretionary
accruals are positively associated with stock returns, future earnings, and operating cash
flows, suggesting that discretionary accruals may communicate information about future
benefits. Tucker and Zarowin (2006) further suggest that income smoothing is one way for
managers to communicate private information and support the notion that income smoothing
could enhance earnings informativeness. However, extant studies suggest alternative
explanation for managers’ income smoothing behavior, i.e., firms may seek to temporarily
deceive investors by opportunistically manipulating accounting numbers and then to