THE EXTEND OF SAUDI COMPANIES PRACTICE TO INCOME SMOOTHING

Abstract

The study examines the relationship between income smoothing and stock price for the companies listed on the Saudi Stock Exchange. The sample size of the study comprised of 30 companies listed on the stock exchange for the period 2008-2017. The study variables include stock price as the dependent variable, income smoothing as the independent variable, while earnings per share, firm’s size, return on asset and leverage as the controlling variables. The study employed Eckel’s approach to classify companies into smoothed and unsmoothed companies. The regression analysis was conducted with fixed effect to data analysis and find association among the variables. The findings of the study show that the companies listed on Saudi Stock Exchange are practicing income smoothing, but the percentage of income smoothing practice in Saudi companies is decreasing with the passage of time. There is no significant relation found between income smoothing and the stock price. Earnings per share is found to have effect on income smoothing practice, while firm size, return on assets and leverage are found to have no effect on income smoothing. The study recommends that as income smoothing does not significantly affect the stock prices, so managers should not manipulate income and let the stock prices reflect the true market value of their companies