Review of Accounting Studies

, Volume 12, Issue 4, pp 525–556

An alternative interpretation of the discontinuity in earnings distributions

  • William H. Beaver
  • Maureen F. McNichols
  • Karen K. Nelson
Article

DOI: 10.1007/s11142-007-9053-0

Cite this article as:
Beaver, W.H., McNichols, M.F. & Nelson, K.K. Rev Acc Stud (2007) 12: 525. doi:10.1007/s11142-007-9053-0

Abstract

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.

Keywords

Earnings distributionsSpecial itemsIncome taxesEarnings management

JEL Classifications

M41G10C89H25

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  • William H. Beaver
    • 1
  • Maureen F. McNichols
    • 1
  • Karen K. Nelson
    • 2
  1. 1.Graduate School of BusinessStanford UniversityStanfordUSA
  2. 2.Jones Graduate School of ManagementRice UniversityHoustonUSA