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Why Are Earnings Kinky? An Examination of the Earnings Management Explanation

Why Are Earnings Kinky? An Examination of the Earnings Management Explanation 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Why Are Earnings Kinky? An Examination of the Earnings Management Explanation

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References (35)

Publisher
Springer Journals
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
DOI
10.1023/A:1024481916719
Publisher site
See Article on Publisher Site

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.

Journal

Review of Accounting StudiesSpringer Journals

Published: Oct 2, 2004

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