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Why are Earnings Kinky? An Examination of the Earnings Management ExplanationPatricia M. DechowUniversity of California, Berkeley - Haas School of Business Scott A. RichardsonLondon Business School A. Irem TunaLondon Business School Review of Accounting Studies, Vol. 8, pp. 355-384, June-September 2003 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 JEL Classification: M41, M43 Accepted Paper SeriesDate posted: September 22, 2003Suggested CitationContact Information
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