Real Earnings Smoothing and Labor Investment Efficiency: The Role of Information Asymmetry

Objective There are two distinct perspectives regarding the impact of real earnings smoothing on labor investment efficiency through its effect on information asymmetry. On one hand, based on signaling theory, real earnings smoothing can reduce information asymmetry and enhance labor investment efficiency. On the other hand, the opportunistic managerial view highlights the opposite effect. Given this context, the present study aims to investigate the impact of real earnings smoothing on labor investment efficiency, with information asymmetry acting as a mediating variable. Methods This study falls under the category of applied research due to the applicability of its findings in the decision-making process. The data utilized in this research were collected based on past real information, making it an ex-post-facto study. Additionally, this research is descriptive-correlational in nature, with the primary objective being the examination of relationships between the research variables. To this end, considering the conditions and constraints imposed on the research population, a sample of 106 companies listed on the Tehran Stock Exchange was selected, and the hypotheses were tested using multivariate regression models. Results The results indicate that an increase in the level of real earnings smoothing leads to improved labor investment efficiency. Furthermore, information asymmetry mediates the relationship between real earnings smoothing and labor investment efficiency, where real earnings smoothing, by reducing information asymmetry, contributes to greater efficiency in labor investment. Conclusion Based on the findings, it can be concluded that company managers use real earnings smoothing to convey hidden information. This information reflects the company's future outlook, which, through consistent earnings smoothing over the years, presents a clear and positive projection of the company's future to investors and creditors. This supports the view that smoothed earnings are indicative of a bright future for the company, as these earnings are perceived by investors and creditors as sustainable. In fact, by using signaling tools, managers reduce market information asymmetry regarding the company’s stock price, enabling the company to secure the necessary financial resources for labor investment and make efficient decisions. Therefore, based on the signaling theory of private information, it can be concluded that real earnings smoothing conveys managers' private information regarding the company's future revenues, thereby reducing the information asymmetry between companies and external capital providers, ultimately leading to greater labor investment efficiency. This research contributes to the growing body of literature on real earnings smoothing and labor investment efficiency, highlighting the importance and positive impact of real earnings smoothing, while also emphasizing the need for further investigations due to the lack of understanding regarding managerial motivations behind real earnings smoothing.