1 Introduction
2 Background and related literature
2.1 Institutional background
2.2 Prior studies on income smoothing
2.3 Hypothesis development
3 Data and methodology
3.1 Sample
3.2 Empirical specification
3.3 Summary statistics
N | Mean | Median | Std | P25 | P75 | |
---|---|---|---|---|---|---|
Smoothing1 | 15,953 | − 0.722 | − 0.598 | 0.536 | − 0.967 | − 0.329 |
Smoothing2 | 15,953 | 0.755 | 0.915 | 0.368 | 0.705 | 0.980 |
Ninth Circuit | 15,953 | 0.201 | 0.000 | 0.401 | 0.000 | 0.000 |
Size | 15,953 | 5.367 | 5.331 | 0.916 | 4.662 | 6.004 |
ROA | 15,953 | 0.084 | 0.120 | 0.238 | 0.060 | 0.178 |
Leverage | 15,953 | 0.622 | 0.191 | 1.422 | 0.025 | 0.582 |
Market-to-book Ratio | 15,953 | 1.819 | 1.327 | 1.570 | 0.992 | 1.987 |
Asset Tangibility | 15,953 | 0.305 | 0.243 | 0.230 | 0.121 | 0.439 |
Cash Flow | 15,953 | 0.149 | 0.066 | 0.190 | 0.017 | 0.208 |
Stock Return | 15,953 | − 0.026 | 0.016 | 0.583 | − 0.318 | 0.295 |
Sales Growth | 15,953 | 0.128 | 0.069 | 0.405 | − 0.034 | 0.199 |
R&D | 15,953 | 0.044 | 0.000 | 0.091 | 0.000 | 0.046 |
CAPEX | 15,953 | 0.070 | 0.046 | 0.076 | 0.024 | 0.087 |
Dividends | 15,953 | 0.345 | 0.000 | 0.476 | 0.000 | 1.000 |
Institutional Ownership | 15,953 | 0.293 | 0.206 | 0.296 | 0.000 | 0.552 |
Analysts Following | 15,953 | 0.880 | 0.000 | 1.071 | 0.000 | 1.792 |
Big N Auditor | 15,953 | 0.864 | 1.000 | 0.343 | 1.000 | 1.000 |
Debt Issue | 15,953 | 0.010 | 0.000 | 0.091 | − 0.016 | 0.018 |
Equity Issue | 15,953 | 0.067 | 0.008 | 0.285 | 0.000 | 0.031 |
Acquisition | 15,953 | 0.343 | 0.000 | 0.475 | 0.000 | 1.000 |
Non-Ninth Circuit States (N = 12,740) | Ninth Circuit States (N = 3,213) | Differences | ||||
---|---|---|---|---|---|---|
Mean | Median | Mean | Median | Mean | Median | |
Panel A. Summary Statistics | ||||||
Smoothing1 | − 0.702 | − 0.582 | − 0.803 | − 0.672 | 0.100*** | 0.089*** |
Smoothing2 | 0.768 | 0.921 | 0.702 | 0.889 | 0.065*** | 0.032*** |
Size | 5.387 | 5.360 | 5.285 | 5.206 | 0.102*** | 0.154*** |
ROA | 0.096 | 0.124 | 0.035 | 0.104 | 0.061*** | 0.020*** |
Leverage | 0.681 | 0.219 | 0.389 | 0.093 | 0.292*** | 0.126*** |
Market-to-book Ratio | 1.744 | 1.303 | 2.116 | 1.448 | − 0.372*** | − 0.145*** |
Asset Tangibility | 0.316 | 0.259 | 0.259 | 0.180 | 0.057*** | 0.080*** |
Cash Flow | 0.127 | 0.053 | 0.234 | 0.163 | − 0.107*** | − 0.110*** |
Stock Return | − 0.014 | 0.025 | − 0.071 | − 0.014 | 0.057*** | 0.038*** |
Sales Growth | 0.125 | 0.068 | 0.140 | 0.076 | − 0.014* | − 0.008 |
R&D | 0.032 | 0.000 | 0.089 | 0.040 | − 0.056*** | − 0.040*** |
CAPEX | 0.071 | 0.046 | 0.069 | 0.046 | 0.002 | 0.000 |
Dividends | 0.380 | 0.000 | 0.207 | 0.000 | 0.174*** | 0.000*** |
Institutional Ownership | 0.290 | 0.204 | 0.302 | 0.211 | − 0.012** | − 0.006 |
Analysts Following | 0.854 | 0.000 | 0.983 | 0.693 | − 0.129*** | − 0.693*** |
Big N Auditor | 0.854 | 1.000 | 0.903 | 1.000 | − 0.049*** | 0.000*** |
Debt Issue | 0.009 | 0.000 | 0.010 | 0.000 | − 0.001 | 0.000 |
Equity Issue | 0.059 | 0.007 | 0.098 | 0.018 | − 0.039*** | − 0.011*** |
Acquisition | 0.343 | 0.000 | 0.343 | 0.000 | 0.001 | 0.000 |
Before | After | Δmean | p-value | Before | After | Δmean | p-value | |
---|---|---|---|---|---|---|---|---|
Panel B. Univariate Tests: variable difference before and after 1999 ruling (Mean Value) | ||||||||
Smoothing1 | − 0.686 | − 0.718 | 0.033*** | 0.000 | − 0.757 | − 0.844 | 0.087*** | 0.000 |
Smoothing2 | 0.784 | 0.752 | 0.033*** | 0.000 | 0.739 | 0.669 | 0.071*** | 0.000 |
Before | After | Δmedian | p-value | Before | After | Δmedian | p-value | |
---|---|---|---|---|---|---|---|---|
Panel C. Univariate Tests: variable difference before and after 1999 ruling (Median Value) | ||||||||
Smoothing1 | − 0.558 | − 0.609 | 0.052*** | 0.000 | − 0.617 | − 0.718 | 0.100*** | 0.000 |
Smoothing2 | 0.928 | 0.912 | 0.016*** | 0.000 | 0.907 | 0.870 | 0.038*** | 0.000 |
4 Main results
4.1 Litigation risk and income smoothing
Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | |
---|---|---|---|---|
(1) | (2) | (3) | (4) | |
Ninth Circuit × Post | − 0.072** | − 0.048** | − 0.080*** | − 0.051** |
(0.029) | (0.022) | (0.029) | (0.022) | |
Size | 0.091** | 0.052* | ||
(0.038) | (0.028) | |||
ROA | 0.107*** | − 0.003 | ||
(0.035) | (0.027) | |||
Leverage | − 0.005 | − 0.001 | ||
(0.006) | (0.003) | |||
Market-to-book Ratio | − 0.002 | 0.002 | ||
(0.005) | (0.004) | |||
Asset Tangibility | 0.068 | 0.022 | ||
(0.087) | (0.066) | |||
Cash Flow | 0.234*** | − 0.005 | ||
(0.057) | (0.042) | |||
Stock Return | 0.010 | − 0.015*** | ||
(0.008) | (0.005) | |||
Sales Growth | 0.005 | 0.010 | ||
(0.011) | (0.007) | |||
R&D | − 0.158 | − 0.089 | ||
(0.150) | (0.112) | |||
CAPEX | 0.017 | − 0.023 | ||
(0.089) | (0.061) | |||
Dividends | 0.124*** | 0.011 | ||
(0.019) | (0.013) | |||
Institutional Ownership | 0.048 | 0.011 | ||
(0.051) | (0.036) | |||
Analysts Following | 0.005 | 0.005 | ||
(0.013) | (0.009) | |||
Big N Auditor | − 0.054 | − 0.015 | ||
(0.033) | (0.026) | |||
Debt Issue | 0.059 | − 0.039 | ||
(0.047) | (0.029) | |||
Equity Issue | − 0.004 | − 0.015 | ||
(0.014) | (0.012) | |||
Acquisition | 0.026** | 0.009 | ||
(0.010) | (0.007) | |||
Firm FE | Yes | Yes | Yes | Yes |
Industry-year FE | Yes | Yes | Yes | Yes |
Adjusted R2 | 0.046 | 0.060 | 0.061 | 0.063 |
Observations | 15,953 | 15,953 | 15,953 | 15,953 |
Smoothing1 | Smoothing2 | |
---|---|---|
(1) | (2) | |
Before−3 × Ninth Circuit | − 0.017 | − 0.019 |
(0.034) | (0.024) | |
Before − 2 × Ninth Circuit | − 0.033 | − 0.019 |
(0.039) | (0.027) | |
Before − 1 × Ninth Circuit | − 0.052 | − 0.006 |
(0.041) | (0.027) | |
After+1 × Ninth Circuit | − 0.094** | − 0.038 |
(0.042) | (0.028) | |
After+2 × Ninth Circuit | − 0.098** | − 0.071** |
(0.045) | (0.030) | |
After+3 × Ninth Circuit | − 0.121*** | − 0.067** |
(0.045) | (0.033) | |
After+4 × Ninth Circuit | − 0.120*** | − 0.076** |
(0.044) | (0.034) | |
Firm Controls | Yes | Yes |
Firm FE | Yes | Yes |
Industry − year FE | Yes | Yes |
Adjusted R2 | 0.062 | 0.063 |
Observations | 15,953 | 15,953 |
Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | |
---|---|---|---|---|
(1) | (2) | (3) | (4) | |
Ninth Circuit × Post | − 0.144*** | − 0.080** | ||
(0.045) | (0.034) | |||
Year − 3 × Ninth Circuit | − 0.036 | 0.001 | ||
(0.054) | (0.037) | |||
Year − 2 × Ninth Circuit | − 0.027 | − 0.014 | ||
(0.064) | (0.043) | |||
Year − 1 × Ninth Circuit | − 0.051 | 0.003 | ||
(0.069) | (0.045) | |||
Year+1 × Ninth Circuit | − 0.143** | − 0.019 | ||
(0.072) | (0.047) | |||
Year+2 × Ninth Circuit | − 0.152** | − 0.094* | ||
(0.073) | (0.050) | |||
Year+3 × Ninth Circuit | − 0.216*** | − 0.110** | ||
(0.073) | (0.054) | |||
Year+4 × Ninth Circuit | − 0.201*** | − 0.136** | ||
(0.072) | (0.055) | |||
Firm Controls | Yes | Yes | Yes | Yes |
Firm FE | Yes | Yes | Yes | Yes |
Industry-year FE | Yes | Yes | Yes | Yes |
Adjusted R2 | 0.118 | 0.100 | 0.119 | 0.103 |
Observations | 3,889 | 3,889 | 3,889 | 3,889 |
Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | |
---|---|---|---|---|
(1) | (2) | (3) | (4) | |
Ninth Circuit × Post | − 0.010 | 0.019 | − 0.008 | 0.017 |
(0.031) | (0.020) | (0.031) | (0.020) | |
Firm Controls | Yes | Yes | Yes | Yes |
Firm FE | Yes | Yes | Yes | Yes |
Industry-year FE | Yes | Yes | Yes | Yes |
Adjusted R2 | 0.011 | 0.008 | 0.027 | 0.015 |
Observations | 9,279 | 9,279 | 9,279 | 9,279 |
4.2 Further analyses and discussion
4.2.1 Cross-sectional variations in the effects of the Ninth Circuit ruling
Smoothing1 | Smoothing2 | |||
---|---|---|---|---|
Long-term Shareholdings | Short-term Shareholdings | Long-term Shareholdings | Short-term Shareholdings | |
(1) | (2) | (3) | (4) | |
Panel A. Investor Horizons | ||||
Ninth Circuit × Post | − 0.051 | − 0.116** | − 0.045 | − 0.078** |
(0.043) | (0.045) | (0.033) | (0.033) | |
Firm Controls | Yes | Yes | Yes | Yes |
Firm FE | Yes | Yes | Yes | Yes |
Industry-year FE | Yes | Yes | Yes | Yes |
Adjusted R2 | 0.091 | 0.097 | 0.095 | 0.113 |
Observations | 8,137 | 7,816 | 8,137 | 7,816 |
Smoothing1 | Smoothing2 | |||
---|---|---|---|---|
Low IVol Risk | High IVol Risk | Low IVol Risk | High IVol Risk | |
(1) | (2) | (3) | (4) | |
Panel B. IVol Risk | ||||
Ninth Circuit × Post | − 0.004 | − 0.107** | 0.027 | − 0.067** |
(0.041) | (0.045) | (0.030) | (0.034) | |
Firm Controls | Yes | Yes | Yes | Yes |
Firm FE | Yes | Yes | Yes | Yes |
Industry-year FE | Yes | Yes | Yes | Yes |
Adjusted R2 | 0.120 | 0.088 | 0.104 | 0.105 |
Observations | 6,774 | 6,868 | 6,774 | 6,868 |
Smoothing1 | Smoothing2 | |||
---|---|---|---|---|
Low Local Beta | High Local Beta | Low Local Beta | High Local Beta | |
(1) | (2) | (3) | (4) | |
Panel C. Outside Options | ||||
Ninth Circuit × Post | − 0.097** | − 0.060 | − 0.060** | − 0.004 |
(0.043) | (0.040) | (0.030) | (0.028) | |
Firm Controls | Yes | Yes | Yes | Yes |
Firm FE | Yes | Yes | Yes | Yes |
Industry-year FE | Yes | Yes | Yes | Yes |
Adjusted R2 | 0.054 | 0.034 | 0.046 | 0.048 |
Observations | 6,764 | 6,774 | 6,764 | 6,774 |
Smoothing1 | Smoothing2 | |||
---|---|---|---|---|
Low Competitiveness | High Competitiveness | Low Competitiveness | High Competitiveness | |
(1) | (2) | (3) | (4) | |
Panel D. Industry Competition | ||||
Ninth Circuit × Post | − 0.038 | − 0.112*** | − 0.014 | − 0.084*** |
(0.042) | (0.039) | (0.030) | (0.030) | |
Firm Controls | Yes | Yes | Yes | Yes |
Firm FE | Yes | Yes | Yes | Yes |
Industry-year FE | Yes | Yes | Yes | Yes |
Adjusted R2 | 0.089 | 0.041 | 0.094 | 0.033 |
Observations | 8,074 | 7,879 | 8,074 | 7,879 |
Smoothing1 | Smoothing2 | |||
---|---|---|---|---|
Non-high-tech Intensity | High-tech Intensity | Non-high-tech Intensity | High-tech Intensity | |
(1) | (2) | (3) | (4) | |
Panel E. Technology Intensity | ||||
Ninth Circuit × Post | − 0.012 | − 0.141** | − 0.038 | − 0.085** |
(0.057) | (0.057) | (0.045) | (0.043) | |
Firm Controls | Yes | Yes | Yes | Yes |
Firm FE | Yes | Yes | Yes | Yes |
Industry-year FE | Yes | Yes | Yes | Yes |
Adjusted R2 | 0.049 | 0.075 | 0.053 | 0.063 |
Observations | 3,612 | 3,595 | 3,612 | 3,595 |
4.2.2 Additional robustness checks
Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | |
---|---|---|---|---|---|---|---|---|---|---|---|---|
(1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) | (10) | (11) | (12) | |
Ninth Circuit × Post | − 0.080*** | − 0.051** | − 0.080*** | − 0.051** | − 0.080*** | − 0.052** | − 0.080*** | − 0.051** | − 0.079*** | − 0.051** | − 0.080*** | − 0.051** |
(0.029) | (0.022) | (0.029) | (0.022) | (0.029) | (0.022) | (0.029) | (0.022) | (0.029) | (0.022) | (0.029) | (0.022) | |
DD | − 0.177*** | − 0.046 | − 0.176*** | − 0.046 | − 0.178*** | − 0.047 | − 0.179*** | − 0.043 | − 0.177*** | − 0.043 | − 0.177*** | − 0.044 |
(0.043) | (0.031) | (0.044) | (0.031) | (0.044) | (0.031) | (0.043) | (0.031) | (0.044) | (0.031) | (0.044) | (0.031) | |
PP | 0.011 | − 0.003 | 0.014 | − 0.001 | 0.014 | − 0.001 | 0.014 | − 0.001 | 0.015 | − 0.001 | ||
(0.038) | (0.023) | (0.038) | (0.023) | (0.038) | (0.023) | (0.038) | (0.023) | (0.040) | (0.024) | |||
BC | − 0.066 | − 0.059 | − 0.054 | − 0.098* | − 0.054 | − 0.098* | − 0.054 | − 0.097* | ||||
(0.067) | (0.044) | (0.076) | (0.052) | (0.076) | (0.052) | (0.076) | (0.052) | |||||
UD | − 0.014 | 0.046 | − 0.013 | 0.046 | − 0.014 | 0.046 | ||||||
(0.048) | (0.035) | (0.048) | (0.035) | (0.048) | (0.035) | |||||||
IDD | 0.012 | − 0.001 | 0.011 | − 0.001 | ||||||||
(0.024) | (0.017) | (0.024) | (0.017) | |||||||||
RIDD | − 0.006 | −0.003 | ||||||||||
(0.036) | (0.023) | |||||||||||
Firm Controls | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
Firm FE | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
Industry-year FE | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
Adjusted R2 | 0.061 | 0.063 | 0.061 | 0.063 | 0.061 | 0.063 | 0.061 | 0.064 | 0.061 | 0.064 | 0.061 | 0.064 |
Observations | 15,953 | 15,953 | 15,953 | 15,953 | 15,953 | 15,953 | 15,953 | 15,953 | 15,953 | 15,953 | 15,953 | 15,953 |
INC_NI | Accr_MJ | Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | Smoothing1 | Smoothing2 | |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) | (10) | (11) | (12) | (13) | (14) | |
Ninth Circuit × Post | − 0.025** | − 0.015** | − 0.052** | − 0.041** | − 0.080*** | − 0.051** | − 0.075** | − 0.052** | − 0.106*** | − 0.052** | − 0.077*** | − 0.050** | − 0.088*** | − 0.051** |
(0.012) | (0.007) | (0.027) | (0.021) | (0.021) | (0.022) | (0.031) | (0.022) | (0.034) | (0.026) | (0.029) | (0.022) | (0.028) | (0.021) | |
Firm Controls | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
Firm FE | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
Industry-year FE | Yes | No | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
Year FE | No | Yes | No | No | No | No | No | No | No | No | No | No | No | No |
State Variables | No | No | No | No | No | No | No | No | No | No | No | No | Yes | Yes |
Adjusted R2 | 0.047 | 0.080 | 0.022 | 0.028 | 0.061 | 0.063 | 0.058 | 0.056 | 0.074 | 0.073 | 0.060 | 0.063 | 0.063 | 0.065 |
Observations | 18,076 | 16,326 | 21,511 | 21,511 | 15,953 | 15,953 | 14,068 | 14,068 | 12,424 | 12,424 | 15,606 | 15,606 | 15,912 | 15,912 |