Date of Award

Spring 5-7-2011

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Accountancy

First Advisor

Dr. Lawrence D. Brown

Second Advisor

Dr. Mark Chen

Third Advisor

Dr. Ilia D. Dichev

Fourth Advisor

Dr. R. Lynn Hannan

Abstract

Existing research suggests that market misvaluations affect corporate investment, often leading to suboptimal investment. I examine whether earnings smoothness reduces the impact of market valuations on corporate investment and in turn enhances investment efficiency. I find that earnings smoothness has a strong negative effect on the sensitivity of corporate investment to stock prices. Further analyses indicate that this negative effect is driven by both innate and discretionary components of earnings smoothness and is more pronounced for firms operating in more volatile business environments. I complement these findings by demonstrating that firms with smoother earnings have lower over- (under-)investment and higher future operating performance. Collectively, the evidence suggests that earnings smoothness improves corporate investment efficiency by reducing the impact of market valuations on investment.

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Accounting Commons

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