Corporate net income smoothing: A variance decomposition approach

• Net income and divided absorption of sales shocks is limited across firms and industries. • Smoothing channels as Materials, G&A expenses, and wages significantly mitigate sales shock. • Net income smoothing channels represent tools for corporate risk management. This study introduces an enriched framework depicting the channels through which managers can mitigate sales shock impacts on firm net income and dividends. Employing variance decomposition, this study provides insights into the proportion of sales shocks absorbed through different firm-level net income smoothing channels. We control for the nature (positive vs. negative) and duration (persistent vs. transitory) of sales shocks. Our findings offer significant insights into income and dividend smoothing. Research implications for theory and practice are further explored.