Political cost influences on income smoothing via extraordinary item classification

Until 1990, Australian managers could classify recurring gains and losses outside the normal operations of the firm as either operating or extraordinary items. The results of this study indicate that managers of companies with highly unionised workforces, and therefore subject to labour-related political costs, attempted to affect the probability of wealth transfers by smoothing reported net operating profit via the classification of those recurring gains and losses. The degree of management ownership is associated with classificatory smoothing but interest coverage is not, indicating differential contracting influences.