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A Theory of Income and Dividend Smoothing Based on Incumbency Rents

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  • Fudenberg, Drew
  • Tirole, Jean

Abstract

Income smoothing is the process of manipulating the time profile of earnings or earnings reports to make the reported income stream less variable. This paper builds a theory of income smoothing based on the managers' concern about keeping their position or avoiding interference, and on the idea that current performance receives more weight than past performance when one is assessing the future. When investment is added to the model, so that income reports and dividends can be set independently, the authors find that both dividends and income reports may be smoothed and that dividends may convey information not present in the income report. Copyright 1995 by University of Chicago Press.

Suggested Citation

  • Fudenberg, Drew & Tirole, Jean, 1995. "A Theory of Income and Dividend Smoothing Based on Incumbency Rents," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 75-93, February.
    • Handle: RePEc:ucp:jpolec:v:103:y:1995:i:1:p:75-93
    DOI: 10.1086/261976
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    References listed on IDEAS

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    1. Dye, Ra, 1988. "Earnings Management In An Overlapping Generations Model," Journal of Accounting Research, Wiley Blackwell, vol. 26(2), pages 195-235.
    2. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
    3. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
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