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The Effect of the Income Smoothing on the Market Return of Listed Companies in Amman Stock Exchange

Amneh Khamees Hamad and Mohammad Abu-Nassar*

ABSTRACT

The study aims to identify the effect of the income smoothing on the market return of the industrial and service companies listed on Amman Stock Exchange. They study also investigates the effect of firm size and type of sector on the income smoothing process. The sample of the study comprises 44 industrial companies and 26 service companies listed on the Amman stock exchange during the period of (1996-2005). Eckel, (1981) model was used to classify the companies into smoothers and non-smoother. Four measures of income are used to achieve the objective of the study which are gross profit, net operating income, income before tax and net income. Three measures for size are used in the study: average of sales, average of total assets, and average of total market value. Descriptive measures, Person Test, Multiple Regression and T-Test are used to analyze the data of the study. The findings of the study revealed that some Jordanian companies practiced income smoothing, where the income smoothing appeared in all four measures of income in both sectors and in different proportions. It also indicated that there is no significant difference occurred between the type of sector and income smoothing behavior by using different income measures except gross profit as a measure of smooth. Also, there is no significant difference occurred between the size of smoothing companies and non-smooth companies concerning their income by using three size measures (average of sales, average of total assets, and average of total market value) with an exception to the difference between the size smooth companies and non-smooth companies in case of using average sales when both sectors are tested at the same time. Finally, the findings indicated that there is a significant statistical impact of income smoothing behavior on abnormal market return.

Keywords: Income Smoothing, Market Return, Size, Sector.

________________________________________________ * Faculty of Business, The University of Jordan, Amman. Received on 9/9/2012 and Accepted for Publication on

21/3/2013.