Why are Earnings Kinky? An Examination of the Earnings Management Explanation

Posted: 22 Sep 2003

See all articles by Patricia Dechow

Patricia Dechow

USC Marshall School of Business

Scott A. Richardson

AQR Capital Management, LLC; London Business School

A. Irem Tuna

London Business School

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

Suggested Citation

Dechow, Patricia and Richardson, Scott Anthony and Tuna, Ayse Irem, Why are Earnings Kinky? An Examination of the Earnings Management Explanation. Review of Accounting Studies, Vol. 8, pp. 355-384, June-September 2003. Available at SSRN: https://ssrn.com/abstract=410543

Patricia Dechow (Contact Author)

USC Marshall School of Business ( email )

Los Angeles, CA 90089-0441
United States

Scott Anthony Richardson

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Ayse Irem Tuna

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Abstract Views
3,483
PlumX Metrics