THE EFFECT OF SFAS 144 ON MANAGERS INCOME SMOOTHING BEHAVIOR

This study assesses the unintended effects of recent accounting regulation (SFAS 144) on a specificform of real activities earnings management, namely the timing of asset sales to smooth income. Thispaper finds that, by changing the qualifying criteria for discontinued operations, SFAS 144 hasmitigated income smoothing through the timing of asset sales. In addition, this study documents thatthe timing of asset sales to smooth earnings is not chosen in isolation (as assumed by prior earningsmanagement literature), but it is part of a broader smoothing strategy that involves the timing ofnonrecurring items in general. The evidence is consistent with managers concurrently timing assetsales with other nonrecurring items (of opposite signs) to smooth their effect and thus, smoothearnings. Because of this concurrent timing behavior, SFAS 144 appears to have a spillover effect onthe timing of other nonrecurring items reported concurrently with asset sales.