INCOME SMOOTHING, COST OF DEBT CAPITAL AND CAPITAL STRUCTURE IN BRAZIL

Authors

  • Miguel Angel Rivera Castro Universidade Federal da Bahia
  • Antonio Lopo Martinez Fundação Instituto Capixaba

Keywords:

Income smoothing, Cost of debt capital, Capital structure, Earnings management, Net income.

Abstract

In this paper using a sample of Brazilian companies and models proposed by Eckel (1981) and Leuz, Nanda, and Wysocki (2003) as empirical proxies to measure income smoothing, test results indicate that companies that promote income  smoothing are likely to have a lower cost of capital and a capital structure with greater percentage of long-term debt. The methodology used included a panel data Nerlove type for a period from 2003 to 2007. The analysis lagged in one and two periods reveals that smoothing will impact on future cost of capital and the capital structure. Results after controlling heterogeneity and factors known to explain the cost of capital and capital structure proved to be robust, indicating the significance of income smoothing with respect to alternative explanatory variables. The influence of smoothing factor in one and two years delayed have comparable magnitude to other factors such as size and risk. The results support the notion that income smoothing in Brazil is an information-signaling mechanism, with implications for the cost of capital and the financing decisions.

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Author Biographies

Miguel Angel Rivera Castro, Universidade Federal da Bahia

Doutorando do Programa de Energia e Meio Ambiente da Universidade Federal da Bahia (UFBA). Professor substituto da Faculdade de Ciências Contábeis da Universidade Federal da Bahia.

Antonio Lopo Martinez, Fundação Instituto Capixaba

Doutor em Administração de Empresas pela Escola de Administração de Empresas de São Paulo da Fundação Getulio Vargas (FGV). Professor do Programa de Pós-Graduação da Fundação Instituto Capixaba de Pesquisa em Contabilidade, Economia e Finanças (Fucape).

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Published

2009-10-23

Issue

Vol. 10 No. 6 (2009): Thematic Special Editon - Golden Jubilee of Modigliani & Miller

Section

Golden Jubilee of Modigliani & Miller

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