An alternative interpretation of the discontinuity in earnings distributions
Purchase on Springer.com
$39.95 / €34.95 / £29.95*
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.
We show that the asymmetric effects of income taxes and special items for profit and loss firms contribute 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.
- Barth, M. E., Beaver, W. H., & Landsman, W. R. (1998). Relative valuation roles of equity book value and net income as a function of financial health. Journal of Accounting and Economics, 25, 1–34. CrossRef
- Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24, 3–37. CrossRef
- Beaver, W. H., McNichols, M. F., & Nelson, K. K. (2003). Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry. Journal of Accounting and Economics, 35, 347–376. CrossRef
- Burgstahler, D., & Dichev, I. (1997a). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24, 99–126. CrossRef
- Burgstahler, D., & Dichev, I. (1997b). Earnings, adaptation, and equity value. The Accounting Review, 72, 187–215.
- Burgstahler, D., Elliott, W. B., & Hanlon, M. (2003). How firms avoid losses: Evidence of use of the net deferred tax asset account. Working paper, University of Washington.
- Collins, D. W., Maydew, E. L., & Weiss, I. S. (1997). Changes in the value-relevance of earnings and book values over the past forty years. Journal of Accounting and Economics, 24, 39–67. CrossRef
- Collins, D. W., Pincus, M., & Xie, H. (1999). Equity valuation and negative earnings: The role of book value of equity. The Accounting Review, 74, 29–61.
- Dechow, P. M., Richardson, S. A., & Tuna, I. A. (2003). Why are earnings kinky? An examination of the earnings management explanation. Review of Accounting Studies, 8, 355–384. CrossRef
- Degeorge, F., Patel, J., & Zeckhauser, R. (1999). Earnings management to exceed thresholds. Journal of Business, 72, 1–33. CrossRef
- Dhaliwal, D., Gleason, C. A., & Mills, L. F. (2004). Last chance earnings management: Using the tax expense to achieve earnings targets. Contemporary Accounting Research, 21(Summer), 431–460. CrossRef
- Durtschi, C., & Easton, P. (2005). Earnings management? The shapes of the frequency distributions of earnings metrics are not evidence ipso facto. Journal of Accounting Research, 43, 557–592. CrossRef
- Elliott, J. A., & Hanna, J. D. (1996). Repeated accounting write-offs and the information content of earnings. Journal of Accounting Research, 34(Supplement), 135–155. CrossRef
- Francis, J., Hanna, J. D., & Vincent, L. (1996). Causes and effects of discretionary asset write-offs. Journal of Accounting Research, 34(Supplement), 117–134. CrossRef
- Frank, M. M., & Rego, S. O. (2003). Do managers use the valuation allowance account to manage earnings around certain earnings targets? Working paper, University of Iowa.
- Hayn, C. (1995). The information content of losses. Journal of Accounting and Economics, 20, 125–153. CrossRef
- Jacob, J., & Jorgensen, B. N. (2006). Earnings management and accounting income aggregation. Working paper, University of Colorado.
- Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(Autumn), 193–228. CrossRef
- McNichols, M. F. (2000). Research design issues in earnings management studies. Journal of Accounting and Public Policy, 19, 313–345. CrossRef
- McNichols, M. F., & Wilson, G. P. (1988). Evidence of earnings management from the provision for bad debts. Journal of Accounting Research, 26(Supplement), 1–31. CrossRef
- Miller, G. S., & Skinner, D. J. (1998). Determinants of the valuation allowance for deferred tax assets under SFAS No. 109. The Accounting Review, 73, 213–233.
- Phillips, J., Pincus, M., & Rego, S. O. (2003). Earnings management: New evidence based on deferred tax expense. The Accounting Review, 78, 491–521. CrossRef
- An alternative interpretation of the discontinuity in earnings distributions
Review of Accounting Studies
Volume 12, Issue 4 , pp 525-556
- Cover Date
- Print ISSN
- Online ISSN
- Springer US
- Additional Links
- Earnings distributions
- Special items
- Income taxes
- Earnings management
- Industry Sectors