Artificial and real income smoothing around corporate governance reforms: further evidence from Egypt

Purpose – We examine whether managers switch from artificial income smoothing using discretionary accruals to real income smoothing around corporate governance reform in Egypt.

Design/methodology/approach – Our sample comprises 61 non-financial companies listed on the Egyptian Stock Exchange for the years 2004-2011. We use discretionary accruals as a proxy for artificial income smoothing and income/loss from asset sales as a proxy for real income smoothing.

Findings – We add to the literature in three crucial respects. First, we show that corporate governance reform did not mitigate real income smoothing. Second, we show that managers did not smooth earnings using discretionary accruals during the period of corporate governance reform. Third, we show that real income smoothing and discretionary accruals are not substitutes.

Originality/value – We offer a significant contribution to accounting literature by providing new empirical evidence on the trade-off between real smoothing technique (e.g., income/loss from asset sales) and discretionary accruals around governance reform in a developing country.