Using income smoothing and its two components – the informational component and the garbled component – we examine whether and how the time-oriented tendency embedded in languages influences corporate financial reporting decisions. Separating languages into weak- versus strong- future time reference (FTR) groups, we find that firms in weak-FTR countries tend to smooth earnings more. We also find that the informational component, rather than the garbled component, of income smoothing is stronger for firms in weak-FTR countries, indicating that income smoothing in weak-FTR countries enhances the informativeness of corporate earnings. These results are consistent with the ‘linguistically-induced bias in time perception’ mechanism of FTR, which suggests that language affects management’s future-related choices by changing how distant future events feel. Taken together, these findings provide new insights into how language influences corporate financial reporting decisions and the informativeness of earnings.
Wenjiao Cao, Linda A. Myers, Zhifang Zhang
Cognitive Linguistics: Cognition