Earnings Management? Erroneous Inferences Based on Earnings Frequency Distributions

Earnings Management? Erroneous Inferences Based on Earnings Frequency Distributions ABSTRACT A vast literature following Hayn (1995) and Burgstahler and Dichev (1997) attributed the so‐called “discontinuities” in earnings distributions around zero to earnings management. Despite recent evidence that these discontinuities are likely caused by other factors, researchers and teachers continue to point to the shapes of these distributions as evidence of earnings management. We provide three sets of further evidence that these discontinuities are likely caused by factors other than earnings management: (1) we provide, as an example, a detailed analysis of the severe effects of sample selection in a recent study; this study erroneously concludes that the shape of an earnings distribution is evidence of earnings management, (2) we provide a simple explanation for the shape of the earnings distribution that is most often cited as evidence of earnings management; the relation between earnings and prices differs with the magnitude and the sign of earnings, and (3) we provide further examples that support the main point of our paper; evidence beyond the mere shape of a distribution must be brought to bear before researchers can draw conclusions regarding the presence/absence of earnings management. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

Earnings Management? Erroneous Inferences Based on Earnings Frequency Distributions

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Publisher
Wiley
Copyright
©, University of Chicago on behalf of the Accounting Research Center, 2009
ISSN
0021-8456
eISSN
1475-679X
D.O.I.
10.1111/j.1475-679X.2009.00347.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT A vast literature following Hayn (1995) and Burgstahler and Dichev (1997) attributed the so‐called “discontinuities” in earnings distributions around zero to earnings management. Despite recent evidence that these discontinuities are likely caused by other factors, researchers and teachers continue to point to the shapes of these distributions as evidence of earnings management. We provide three sets of further evidence that these discontinuities are likely caused by factors other than earnings management: (1) we provide, as an example, a detailed analysis of the severe effects of sample selection in a recent study; this study erroneously concludes that the shape of an earnings distribution is evidence of earnings management, (2) we provide a simple explanation for the shape of the earnings distribution that is most often cited as evidence of earnings management; the relation between earnings and prices differs with the magnitude and the sign of earnings, and (3) we provide further examples that support the main point of our paper; evidence beyond the mere shape of a distribution must be brought to bear before researchers can draw conclusions regarding the presence/absence of earnings management.

Journal

Journal of Accounting ResearchWiley

Published: Dec 1, 2009

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