Review of Accounting Studies

, Volume 8, Issue 2, pp 355-384

First online:

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

  • Patricia M. DechowAffiliated withUniversity of Michigan Business School Email author 
  • , Scott A. RichardsonAffiliated withThe Wharton School, University of Pennsylvania
  • , Irem TunaAffiliated withThe Wharton School, University of Pennsylvania

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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