EconPapers    
Economics at your fingertips  
 

Earnings management in the aftermath of the zero-earnings discontinuity disappearance

Naser Makarem, Khaled Hussainey and Alaa Zalata

Journal of Applied Accounting Research, 2018, vol. 19, issue 3, 401-422

Abstract: Purpose - The purpose of this paper is to investigate earnings management by firms reporting a small profit or a small loss after the recent evidence that the discontinuity around zero earnings has disappeared. Design/methodology/approach - Using a large sample of US firms for the period 2002–2011, regression analysis and earnings distribution approach are employed to examine the earnings management of small-profit and small-loss firms in terms of both accruals management and real activities manipulation. Findings - The results suggest that both small-profit and small-loss firms are engaged in upward manipulation of accruals and real activities. This implies that failure to document a difference between firms to the right and left of zero by prior studies is not due to small-profit firms not managing earnings, but rather this is more attributable to loss firms engaging in upward manipulation. Furthermore, it is indicated that the discontinuity around the distribution of earnings change has also recently disappeared as firms reporting a small earnings decrease demonstrate similar earnings management behaviour to those reporting a small earnings increase. Research limitations/implications - This study is subject to the measurement error which is a common limitation in the earnings management literature. Practical implications - The results suggest that the users should be aware that, in addition to firms that meet benchmarks by a slight margin, firms narrowly missing benchmarks are also involved in earnings management. Originality/value - This study shows that the disappearance of the discontinuity around zero earnings and zero change in earnings should not be interpreted as a sign of no earnings management. It also explains how earnings management could have contributed to the disappearance of the discontinuities in earnings distribution.

Keywords: Financial reporting; Earnings management; Accruals management; Earnings discontinuity; Earnings distribution; Real activities manipulation (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.emeraldinsight.com/10.1108/JAAR-03-2017 ... RePEc&WT.mc_id=RePEc (text/html)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jaarpp:jaar-03-2017-0047

Ordering information: This journal article can be ordered from
Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
http://emeraldgroupp ... journals.htm?id=jaar

Access Statistics for this article

Journal of Applied Accounting Research is currently edited by Julia Mundy

More articles in Journal of Applied Accounting Research from Emerald Group Publishing
Bibliographic data for series maintained by Virginia Chapman ().

 
Page updated 2019-03-02
Handle: RePEc:eme:jaarpp:jaar-03-2017-0047