The effect of income smoothing on crash risk: A cross-country analysis

This paper analyzes financial data from 42 countries to explore the relationship between income smoothing and stock price crash risk in an international context. The empirical findings indicate a positive association between income smoothing and crash risk, reinforcing the idea that it contributes to increased information opacity. The cross-country analysis reveals that this effect is intensified in regions characterized by weaker investor protection, lower transparency, and underdeveloped capital markets. Conversely, income smoothing significantly mitigates crash risk in countries with weak contract enforceability. These results underscore the vital role of institutional environments in shaping managerial incentives and behaviors, suggesting that stronger governance frameworks can alleviate the negative impacts of income smoothing on capital markets.