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

Patricia M. Dechow (), Scott A. Richardson and Irem Tuna
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Patricia M. Dechow: University of Michigan Business School
Scott A. Richardson: University of Pennsylvania
Irem Tuna: University of Pennsylvania

Review of Accounting Studies, 2003, vol. 8, issue 2, No 14, 355-384

Abstract: 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.

Keywords: accruals; earnings distribution; discretionary accruals; earnings management (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1023/A:1024481916719

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