Earnings Smoothing, Cash Flow Volatility, and CEO Cash Bonus

Somnath Das, Philip Keejae Hong

Research output: Contribution to journalArticlepeer-review


Prior studies generally relate managers’ decisions to smooth earnings to their desire to maximize their overall compensation and to smooth their consumption. However, earnings smoothing could also be driven by the firm’s expected benefits from reporting a smooth earnings stream. Our paper provides empirical support for the latter explanation of earnings smoothing. Specifically, we find that while CEO bonus on average increases with earnings smoothing, the increase is larger when the firm’s cash flow volatility is higher. Further, CEO bonus is shielded from the negative effects of lower earnings arising from the need to report a smoother earnings stream.
Original languageEnglish
Pages (from-to)123-150
JournalFinancial Review
Issue number1
StatePublished - Feb 2013


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