Why do Firms Smooth Earnings? This link provides access to a research paper that argues that "information asymmetry" explains why a firms smooth reported earnings.

The key to the analysis is that, when the volatility of the firm's earnings is high, private information about the firm is more valuable, and more investors become informed. This means higher expected losses for shareholders who trade for liquidity. Shareholders, therefore, abhor earnings volatility and pay less for firms with higher earnings volatility.

The manager responds by smoothing earnings to affect market perceptions of earnings volatility and hence the firm's stock price. However, the market understands this in equilibrium and is not fooled. This means that there is no overall benefit from smoothing in equilibrium. The phenomenon persists nonetheless because not smoothing when the market expects smoothing can result in the firm's stock price being lower than its true value. It is interesting that what causes smoothing in our analysis is the manager's concern about long-term stock price performance rather than just the current stock price. A "myopic" manager would simply inflate earnings.