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The Effect of Language on Income Smoothing: Cross-Country Evidence

Author

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  • Wenjiao Cao

    (Erasmus School of Economics, Erasmus University Rotterdam, 3062 PA Rotterdam, Netherlands)

  • Linda A. Myers

    (Haslam College of Business, University of Tennessee, Knoxville, Tennessee 37996-4140)

  • Zhifang Zhang

    (Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom)

Abstract

We examine whether and how the time-oriented tendency embedded in languages influences income smoothing. Separating languages into weak- versus strong-future time reference (FTR) groups, we find that firms in weak-FTR countries tend to smooth earnings more. We also find that relationships with major stakeholders (i.e., debtholders, suppliers, and employees) amplify the effect of the FTR of languages on income smoothing. Additional analyses suggest that income smoothing driven by the FTR of languages enhances earnings informativeness. These findings provide new insights on the role that language plays in financial reporting decisions and on how relationships with major stakeholders influence the relation between an important feature of language and corporate income smoothing behavior.

Suggested Citation

  • Wenjiao Cao & Linda A. Myers & Zhifang Zhang, 2024. "The Effect of Language on Income Smoothing: Cross-Country Evidence," Management Science, INFORMS, vol. 70(9), pages 5832-5852, September.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:9:p:5832-5852
    DOI: 10.1287/mnsc.2021.01753
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