The Case of the Missing ‘Kink’: A Re-Examination of Earnings Management to Avoid Reporting Negative EPS*
City University of New York (CUNY) - Stan Ross Department of Accountancy
Wichita State University
September 1, 2009
Previous research suggests that the annual distribution of EPS lacks a kink which is viewed as evidence against earnings management. However, a recent paper argues that earnings management is better inferred from the change in the distribution during the fourth quarter, rather than from the shape of the annual distribution itself. We examine changes in the distribution of EPS during the fourth quarter and find that firms with small cumulative EPS losses after three quarters shift abnormally to achieve positive EPS, suggesting that firms manipulate earnings to convert small negative EPS to small positive EPS.
Number of Pages in PDF File: 38
Keywords: EPS, Earnings management, Thresholds, EPS distribution, Losses
JEL Classification: M4, M41, M43, C89working papers series
Date posted: September 2, 2009 ; Last revised: December 5, 2012
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