Income Smoothing and Market Perception of Accounting Numbers: An Empirical Investigation of Extraordinary Items

Abstract

This paper examines issues related to the reporting of extraordinary items in financial statements companies. The first issue concer the change of accounting standards on extraordinary which has limited the scope of extraordinary items. It is found that there are significant om the incidence of reported extraordinary items during the period after the adoption of seandard. The findings supported the arguments that the new standard on extraordinary consequently reduce significantly the items from financial statements. This paper sizes that extraordinary items classification choice is a means used by companies to smooth Two types of statistical tests performed have confirmed the proposition that the disclosure inary items is subject to this type of manipulation during the period before the adoption fe sew standard. Although it is proved that the broad definition of extraordinary items allows ies to manipulate income, evidence gathered from multivariate regressions demonstrate inary items are value-relevance for investors in valuing a firm's equity. Thus, investors isto account the extraordinary items even though it is disclosed ‘below the line’.