Review of Accounting Studies

, Volume 8, Issue 2, pp 355–384

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

Authors

    • University of Michigan Business School
  • Scott A. Richardson
    • The Wharton SchoolUniversity of Pennsylvania
  • Irem Tuna
    • The Wharton SchoolUniversity of Pennsylvania
Article

DOI: 10.1023/A:1024481916719

Cite this article as:
Dechow, P.M., Richardson, S.A. & Tuna, I. Review of Accounting Studies (2003) 8: 355. doi:10.1023/A:1024481916719

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.

accruals earnings distribution discretionary accruals earnings management

Copyright information

© Kluwer Academic Publishers 2003