Economics at your fingertips  

A Rational Expectations Theory of the Kink in Earnings Reports

Ilan Guttman, Ohad Kadan and Eugene Kandel ()

No 4613, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Empirical evidence suggests that the distribution of earnings reports exhibits kinks. Managers manage earnings as if to meet exogenously pre-specified targets, such as avoiding losses and avoiding a decrease in earnings. This is puzzling because the compensation to managers at these pre-specified targets seems to be smooth. We propose a game theoretic model explaining this phenomenon. In our model, investors form expectations of such a manipulative behaviour by the manager. Given these expectations, the best response of the manager is to fulfill the investors’ expectations, resulting in a discontinuity in the distribution of earnings reports. Our model generates several new empirical predictions regarding the existence of the kink, its size and its location relative to the distribution of earnings reports.

Keywords: analysts forecasts; earnings management; earnings reports; managerial compensation; stock-based compensation (search for similar items in EconPapers)
JEL-codes: D82 G30 (search for similar items in EconPapers)
Date: 2004-09
New Economics Papers: this item is included in nep-fin
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

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:

Ordering information: This working paper can be ordered from ... ers/dp.php?dpno=4613

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

Page updated 2021-04-01
Handle: RePEc:cpr:ceprdp:4613