An Alternative Interpretation of the Discontinuity in Earnings Distributions

55 Pages Posted: 20 Jan 2004

See all articles by William H. Beaver

William H. Beaver

Stanford University

Maureen F. McNichols

Stanford University

Karen K. Nelson

Texas Christian University - Department of Accounting

Date Written: June 2006

Abstract

We show that the asymmetric effects of income taxes and special items for profit and loss firms contribute substantially to a discontinuity at zero in the distribution of earnings. Income taxes draw profit observations towards zero while negative special items pull loss observations away from zero. These earnings components are thus expected to contribute to a discontinuity even in the absence of discretion. We show our results are not an artifact of deflation, and that other common components of earnings do not have similar effects on the earnings distribution around zero.

Keywords: earnings management, earnings distributions, conservatism, taxes

JEL Classification: M41, M43, G10, C89, H25

Suggested Citation

Beaver, William H. and McNichols, Maureen F. and Nelson, Karen K., An Alternative Interpretation of the Discontinuity in Earnings Distributions (June 2006). Available at SSRN: https://ssrn.com/abstract=384580 or http://dx.doi.org/10.2139/ssrn.384580

William H. Beaver

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4409 (Phone)
650-725-6152 (Fax)

Maureen F. McNichols (Contact Author)

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)
650-725-7979 (Fax)

Karen K. Nelson

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States
817-257-7567 (Phone)

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