''Income smoothing'' is the process of manipulating the time profile o
f earnings or earnings reports to make the reported income stream less
variable. This paper builds a theory of income smoothing based on the
managers' concern about keeping their position or avoiding interferen
ce, and on the idea that current performance receives more weight than
past performance when one is assessing the future. When investment is
added to the model, so that income reports and dividends can be set i
ndependently, we find that both dividends and income reports may be sm
oothed and that dividends may convey information not present in the in
come report.