Real Earnings Smoothing and Labor Investment Efficiency: The Role of Information Asymmetry

Real Earnings Smoothing and Labor Investment Efficiency: The Role of Information Asymmetry

Abstract

Objective: There are two different perspectives on the impact of real earnings smoothing on the efficiency of labor investment through its effect on information asymmetry. On the one hand, real earnings smoothing, supported by the signaling theory, reduces information asymmetry and increases the efficiency of investment in labor. On the other hand, the managerial opportunism perspective highlights the opposite effect. Given this background, the aim of this study is to investigate the impact of real earnings smoothing on the efficiency of labor investment through information asymmetry as a mediating variable.

Method: The present study belongs to the field of applied research due to the usability of its results in the decision-making process. In this study, data were collected based on actual past information and therefore are of a retrospective nature. Additionally, this research is descriptive-correlational in nature, in which the main objective is to investigate and study the relationships between research variables. To this end, considering the conditions and limitations imposed on the study population, a sample of 106 companies listed on the Tehran Stock Exchange was selected and tested using multivariate regression models.

Findings: The results indicate that as the level of real earnings smoothing increases, the efficiency of labor investment in companies also increases. Additionally, information asymmetry in the relationship between smoothing real earnings and labor investment efficiency had a mediating effect, and real earnings smoothing leads to increased efficiency of labor investment by reducing information asymmetry.

Conclusion: Based on the results obtained, company managers use real earnings smoothing to transfer hidden information. This information reflects the company's future prospects, and by earnings smoothing over consecutive years, it provides investors and creditors with a clear and positive outlook on the company's future, supporting the view that smooth earnings indicate a clear future outlook for the company, and these earnings are stable in the eyes of investors and creditors. In fact, managers reduce information asymmetry in the market regarding the company's stock price by using signaling tools, which enables them to have the necessary financial resources for their investments in labor and make efficient decisions. Therefore, based on the results obtained, it can be concluded that real earnings smoothing transfers managers' private information about the company's future income, supporting the signaling theory of private information. As a result, it reduces information asymmetry between companies and foreign capital providers, leading to increased efficiency of labor investment. This research has contributed to the growing flow of literature on real earnings smoothing and labor investment efficiency, and while highlighting the importance and positive impact of real earnings smoothing, it emphasizes the need for further investigations due to the lack of understanding of managers' motivations for real profit smoothing.

Keywords: Information Asymmetry, Labor Investment Efficiency, Real Earnings Smoothing.