Managers have many possible reasons to reduce the variation in reported income of their firm over time, i.e., to make it smoother than it would otherwise be. This paper applies the coefficient of variation method to 142 listed companies in the Taiwan Stock Exchange over the 10-year period-extending from beginning of 1995 to the end of 2004-to identify whether the income-smoothing behavior occurs among Taiwan listed companies. The result from this study shows that the percentages of smoothing in four income measures by firms are about to 27%. Income smoothing behavior does exist in Taiwan listed companies, but it is not a very popular method to manipulate reported earnings. Furthermore, this paper identifies factors that may influence income-smoothing behavior, The presence of four incentives is inferred: profitability, the degree of debt, the level of dividend pay out and the size of firms. Univariate analysis demonstrates that the average rate on return of stockholder equity for smoothing firms is significantly less than the returns of non-smoothing firms. The finding is also confirmed by the logistic regression analysis. Overall, our finding indicates there is a strong negative relationship between profitability and income smoothing behavior, A firm that achieves lower profitability has a greater incentive to smooth reported income.
