Why Are Earnings Kinky? An Examination of the Earnings Management Explanation |
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Authors: | Patricia M Dechow Scott A Richardson Irem Tuna |
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Institution: | (1) University of Michigan Business School, 701 Tappan Street, Ann Arbor, MI, 48109-1234;(2) The Wharton School, University of Pennsylvania, USA |
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Abstract: | Prior research has documented a kink in the earnings distribution: too few firms report small losses, too many firms report small profits. We investigate whether boosting of discretionary accruals to report a small profit is a reasonable explanation for this kink. Overall, we are unable to confirm that boosting of discretionary accruals is the key driver of the kink. We caution the use of the ratio of small profit firms to small loss firms as a measure of earnings management. We investigate and discuss a number of alternative explanations for the kink. |
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Keywords: | accruals earnings distribution discretionary accruals earnings management |
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