Nexus between Asymmetric Information and Income Smoothing in Emerging Economies: Evidence from Nigeria

The management of corporations is often motivated to make accounting choices in financial reporting that help them actualize desired objectives such as smoothing income. Such management practices as income smoothing have however been partly blamed for failure of some multinational corporations in the past. The aim of this study was to assess the effect of asymmetric information on income smoothing. Specifically, the influence of contemporaneous and multi (future) period information asymmetry on income smoothing was assessed. Using a mixed method approach, two measures of asymmetric information, INFO-1(stock price synchronicity) and INFO-2 (earnings persistence) were employed, which were considered within two periods: the contemporaneous and future periods. Asymmetric information was shown to have a negative and significant effect on income smoothing, using stock price synchronicity information asymmetry model and also negative and significant effect on income smoothing using earnings persistence model, the second information asymmetry model. The dynamic models in the multi-period setting showed that income smoothing was also influenced by asymmetric information in future periods but with both positive and negative effects for the different models. The dynamic models have implications for the signaling theory. In the light of these findings, it is concluded that asymmetric information has significant effect on income smoothing in both current and future periods.