Earnings Management? The Shapes of the Frequency Distributions of Earnings Metrics are Not Evidence Ipso Facto

Journal of Accounting Research, Vol. 43, pp. 557-592, September 2005

36 Pages Posted: 8 May 2006

See all articles by Peter D. Easton

Peter D. Easton

University of Notre Dame - Department of Accountancy

Date Written: 2005-02-12

Abstract

We provide evidence that the shapes (particularly around zero) of the frequency distributions of earnings metrics examined in the extant earnings management literature are affected by (1) deflation (using, for example, price or market capitalization), (2) sample selection criteria that lead to differential inclusion/exclusion of observations to the left of zero versus observations to the right of zero (implicit in studies focusing on firms followed by I/B/E/S and explicit in studies partitioning on a variable differing between loss observations and profit observations), (3) differences between the characteristics of observations to the left of zero and observations to the right of zero (such as market pricing and analyst optimism/pessimism), or (4) a combination of these factors. Since the shapes of the frequency distributions of earnings metrics at zero are likely due to one of the above effects, we conclude that the shapes cannot be used as ipso facto evidence of earnings management.

Suggested Citation

Easton, Peter D., Earnings Management? The Shapes of the Frequency Distributions of Earnings Metrics are Not Evidence Ipso Facto (2005-02-12). Journal of Accounting Research, Vol. 43, pp. 557-592, September 2005, Available at SSRN: https://ssrn.com/abstract=876681 or http://dx.doi.org/10.1111/j.1475-679X.2005.00182.x

Peter D. Easton

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6096 (Phone)
574-631-5127 (Fax)

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