TY  - JOUR
AU  - Acharya,Viral V.
AU  - Lambrecht,Bart M.
TI  - A Theory of Income Smoothing When Insiders Know More Than Outsiders
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17696
PY  - 2011
Y2  - December 2011
UR  - http://www.nber.org/papers/w17696
L1  - http://www.nber.org/papers/w17696.pdf
N1  - Author contact info:
Viral V. Acharya
Stern School of Business
New York University
44 West 4th Street, Suite 9-84
New York, NY 10012
Tel: 212/998-0354
Fax: 212 995 4233
E-Mail: vacharya@stern.nyu.edu

Bart Lambrecht
Lancaster University Management School
Room C-42
Bailrigg
Lancaster  LA1 4YX, UK
Tel: 44 0 1524 592711
Fax: 44 0 1524 847321
E-Mail: b.lambrecht@lancaster.ac.uk
AB  - We consider a setting in which insiders have information about income that outside shareholders do not, but property rights ensure that outside shareholders can enforce a fair payout.  To avoid intervention, insiders report income consistent with outsiders' expectations based on publicly available information rather than true income, resulting in an observed income and payout process that adjust partially and over time towards a target. Insiders under-invest in production and effort so as not to unduly raise outsiders' expectations about future income, a problem that is more severe the smaller is the inside ownership and results in an "outside equity Laffer curve".  A disclosure environment with adequate quality of independent auditing mitigates the problem, implying that accounting quality can enhance investments, size of public stock markets and economic growth.
ER  -