A New Methodological Approach for Detecting Income Smoothing in Small Samples: An Application to the Case of Spanish Savings Banks

This paper proposes a new methodological approach arising from an idea first presented in Burgsthaler and Dichev (1997) for detecting income smoothing. The proposed test does not rely on specific distributional assumptions, as is the case in previous studies, and may be applied to small databases. The procedure could be particularly useful in analyzing economic activities where significant economic power is concentrated in a small number of firms. The proposed methodology is applied to the case of Spanish Savings Banks during the period 1993-2001. It is revealed that these institutions would appear to be interested in reporting a consistently stable and detectable growth rate. Income smoothing is essentially applied to avoid both small earnings decreases and very small earnings increases. Income smoothing is revealed in changes in scaled pretax earnings and in scaled surplus (net earnings) for the year.