Why are Earnings Kinky? An Examination of the Earnings Management Explanation
Patricia M. Dechow
University of California, Berkeley - Haas School of Business
Scott A. Richardson
London Business School; AQR Capital Management, LLC
A. Irem Tuna
London Business School
Review of Accounting Studies, Vol. 8, pp. 355-384, June-September 2003
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, M43Accepted Paper Series
Date posted: September 22, 2003
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