The Theoretical Construction of Income Smoothing Measurement

Abstract

The income smoothing is a dimension of the accounts manipulation theme that has been attracting a great attention in the accounting literature. A goal of manipulation widely ascribed to managers is the desire to smooth. Reported income, Income smoothing reflects reducing the possible income fluctuations so as to make it as stable as possible throughout the ism. Almost of income smoothing research in Indonesia used Eckel’s index to clasify smoother non smoother firms. Empirical evidences have provided support for the existence of an income smoothing behavior. The studies showed inconsistent about factors determining this smoothing. The purpose of the present investigation is twofold. First, we seek to determine if Eckel index is a reliable instrument to measure income smoothing behavior. Second, we pretend to identify the new instrument to measure incidence of income smoothing. Our research sample comprises manufacturing companies listed on the Indonesia Stock Exchange, over period of 1999-2008. This study confirms Eckel’s index is not reliability instrument. The new proposed index quantifies the incidence of income smoothing without depend onn periods. The results imply that researchers should re-examine the conclusion of previous studies, particularly that determinant, factors and effect of income smoothing practices.