SOME TIME SERIES PROPERTIES OF ACCOUNTING INCOME

This article applies different methods from those of previous researchers, but the conclusion is unchanged. We conclude that, in general, measured annual accounting incomes for U.S. corporations follow either a submartingale or some very similar process.1 Because of small sample problems this conclusion is based on mean and median results; no attempt has been made to determine whether specific' firms are systematic outliers. The conclusion that corporate incomes are submartingales has important implications for forecasters and researchers in accounting and finance. For example, it implies that attempts to smooth corporate incomes in the manner suggested in the accounting and finance literatures are not successful. It also affects the interpretation of the growth and decline of firms. II. THE SMOOTHING OF INCOME The accounting and finance literatures are replete with the suggestion that accountants smooth the incomes of firms. That is, it is commonly hypothesized that accountants manipulate their income-measuring techniques in order to soften the effect of hard times upon income and, conversely, in order to diminish the extent to which good times are contemporaneously reflected in income. The hypothesis that accountants do smooth income and the belief that they should smooth income have existed for decades. Hepworth [25], Gordon [21, 223, Gordon et al. [23], Schiff [36], Dopuch and Drake [14], Copeland [10], Copeland and Licastro [11], and Gagnon [20] all investigate income

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