An Analysis of the Reasons for the Asymmetries Surrounding Earnings Benchmarks
New Zealand Institute of Chartered Accountants (NZICA)
Michael E. Bradbury
Please enter abstract text here.Several studies report an asymmetry in the distribution of earnings around specified benchmarks (Hayn 1995; Burgstahler and Dichev 1997; Degeorge et al. 1999; Brown and Caylor 2005). Doubt has arisen over whether the observed kink in the distribution of earnings is solely caused by earnings management (Dechow et al. 2003; Coulton et al. 2005; Beaver et al. 2006 and Durtschi and Easton 2005). We use a ratio analysis approach to examine a range of specific accruals for earnings management. We find little evidence that firms immediately above the benchmark have abnormal receivables, inventories or provisions. However, they do increase cash-from-customers and reduce inventory. Thus our results support the recent research that suggests firms engage in real actions to meet earnings benchmarks (Ewert and Wagonhofer 2006; Graham et al. 2005, Roychowdhury 2006).
Number of Pages in PDF File: 48
Keywords: Earnings benchmarks, earnings management, ratio analysis, direct cash flows
JEL Classification: C89, G10, M41working papers series
Date posted: February 6, 2008
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