The Effect of Language on Income Smoothing: Cross-Country Evidence

Abstract

We examine whether and how the time-oriented tendency embedded in languages influences income smoothing. Separating languages into weak- versus strong-future time reference (FTR) groups, we find that firms in weak-FTR countries tend to smooth earnings more. We also find that relationships with major stakeholders (i.e., debtholders, suppliers, and employees) amplify the effect of the FTR of languages on income smoothing. Additional analyses suggest that income smoothing driven by the FTR of languages enhances earnings informativeness. These findings provide new insights on the role that language plays in financial reporting decisions and on how relationships with major stakeholders influence the relation between an important feature of language and corporate income smoothing behavior. This paper was accepted by Brian Bushee, accounting. Funding: L. A. Myers acknowledges financial support from the University of Tennessee [the Haslam Chair of Business and the Haslam Family Faculty Research Fellowship]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2021.01753 .