A Relationship between Income Smoothing Practices and Firms Value in Iran

This paper examines the relationship between income smoothing practices and firms value in Iran. This research also studies the effect of the firms’ size on the tendency to smooth income. The sample comprises 200 companies listed in the Tehran Stock Exchange within the period of 1999-2005. The "coefficient of variation method" introduced by Eckel (1981) has been modified to determine income smoothing practices. The result indicates that income smoothing practices is was present although its percentage is low. The univariate test has found that smaller firms have greater tendency to smooth income rather than larger firms. Then, an Ordinary Least Square (OLS) regression was conducted on a modified income statement model. The heteroscedasticity problem detected by a diagnostic test was encountered by (1) deflating the variable by total sales and (2) using White's heteroscedasticity-adjusted standard errors. The consistent results obtained signify that the valuation of firms concerns more on the magnitude of earnings rather than earnings stream.