Why Are Earnings Distributions Kinky: Upwards Earnings Management by Small-Profit Firms or Income Smoothing by Many Firms?

65 Pages Posted: 29 Oct 2011 Last revised: 25 Apr 2014

See all articles by David G. Harris

David G. Harris

Syracuse University - Joseph I. Lubin School of Accounting

Linna Shi

University of Cincinnati - Lindner College of Business

Date Written: April 12, 2014

Abstract

Previous literature on earnings management has examined the maintained hypothesis that firms barely beating earnings benchmarks are earnings manipulators with earnings before accounting manipulation otherwise slightly below their benchmarks and has implemented research designs that treat all suspect earnings-managing firms as engaging in this behavior. Little support has been found for this hypothesis. In this paper, we develop a two-way, reported earnings conditional on non-discretionary earnings, research design to examine this conjecture and find a more complex story: earnings management to barely meet benchmarks consisting of positive, negative, large, and small discretionary accruals – earnings smoothing. This result holds for all three financial benchmarks (i.e., zero earnings levels, earnings changes, and analyst forecasts) across a number of conservative and robust research designs.

Keywords: Earnings Management, Financial Benchmarks, Discretionary Accruals

JEL Classification: G31, M40, M41

Suggested Citation

Harris, David G. and Shi, Linna, Why Are Earnings Distributions Kinky: Upwards Earnings Management by Small-Profit Firms or Income Smoothing by Many Firms? (April 12, 2014). Available at SSRN: https://ssrn.com/abstract=1950745 or http://dx.doi.org/10.2139/ssrn.1950745

David G. Harris (Contact Author)

Syracuse University - Joseph I. Lubin School of Accounting ( email )

Whitman School of Management
721 University Ave
Syracuse, NY 13244-2130
United States
315-443-3362 (Phone)
315-443-5457 (Fax)

Linna Shi

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States
(513) 556-2097 (Phone)

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