A Theory of Income Smoothing When Insiders Know More than Outsiders

Acharya, Viral V.; Lambrecht, Bart M.

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A Theory of Income Smoothing When Insiders Know More than Outsiders

NYU Working Paper No. 2451/31367

58 Pages Posted: 15 Dec 2011 Last revised: 5 Sep 2014

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Bart M. Lambrecht

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

There are 4 versions of this paper

Date Written: September 3, 2014

Abstract

We develop a theory of income and payout smoothing by firms when insiders know more about income than outside shareholders, but property rights ensure that outsiders can enforce a fair payout. Insiders set payout to meet outsiders' expectations and underproduce to manage downward future expectations. The observed income and payout process are smooth and adjust partially and over time in response to economic shocks. Underproduction is more severe the smaller is the inside ownership and results in an "outside equity Laffer curve".

Keywords: payout policy, asymmetric information, under-investment, finance and growth

JEL Classification: G32, G35, M41, M42, O43, D82, D92

Suggested Citation: Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Lambrecht, Bart, A Theory of Income Smoothing When Insiders Know More than Outsiders (September 3, 2014). NYU Working Paper No. 2451/31367, Available at SSRN: https://ssrn.com/abstract=1972805