Earnings management in the aftermath of the zero-earnings discontinuity disappearance
Earnings management in the aftermath of the zero-earnings discontinuity disappearance
Purpose: The purpose of this paper is to investigate earnings management by firms reporting a small profit or a small loss after the recent evidence that the discontinuity around zero earnings has disappeared.
Design/methodology/approach: Using a large sample of US firms for the period 2002-2011, regression analysis and earnings distribution approach are employed to examine the earnings management of small profit and small loss firms in terms of both accruals management and real activities manipulation.
Findings: The results suggest that both small profit and small loss firms are engaged in upward manipulation of accruals and real activities. This implies that failure to document a difference between firms to the right and left of zero by prior studies is not due to small profit firms not managing earnings, but rather this is more attributable to loss firms engaging in upward manipulation. Furthermore, it is indicated that the discontinuity around the distribution of earnings change has also recently disappeared as firms reporting a small earnings decrease demonstrate similar earnings management behavior to those reporting a small earnings increase.
Research limitations/implications: This study is subject to the measurement error which is a common limitation in the earnings management literature.
Practical implications: The results suggest that the users should be aware that, in addition to firms that meet benchmarks by a slight margin, firms narrowly missing benchmarks are also involved in earnings management.
Originality/value: This study shows that the disappearance of the discontinuity around zero earnings and zero change in earnings should not be interpreted as a sign of no earnings management. It also explains how earnings management could have contributed to the disappearance of the discontinuities in earnings distribution.
401-422
Makarem, Naser
d8d3b4fa-18f8-46f7-80f6-e35903eac8e3
Hussainey, Khaled.
79586e46-b4c8-455c-ad6b-88e9334d9051
Zalata, Alaa
0fc2c56d-97ad-44ce-ab31-63ca335dcef6
10 September 2018
Makarem, Naser
d8d3b4fa-18f8-46f7-80f6-e35903eac8e3
Hussainey, Khaled.
79586e46-b4c8-455c-ad6b-88e9334d9051
Zalata, Alaa
0fc2c56d-97ad-44ce-ab31-63ca335dcef6
Makarem, Naser, Hussainey, Khaled. and Zalata, Alaa
(2018)
Earnings management in the aftermath of the zero-earnings discontinuity disappearance.
Journal of Applied Accounting Research, 19 (3), .
(doi:10.1108/JAAR-03-2017-0047).
Abstract
Purpose: The purpose of this paper is to investigate earnings management by firms reporting a small profit or a small loss after the recent evidence that the discontinuity around zero earnings has disappeared.
Design/methodology/approach: Using a large sample of US firms for the period 2002-2011, regression analysis and earnings distribution approach are employed to examine the earnings management of small profit and small loss firms in terms of both accruals management and real activities manipulation.
Findings: The results suggest that both small profit and small loss firms are engaged in upward manipulation of accruals and real activities. This implies that failure to document a difference between firms to the right and left of zero by prior studies is not due to small profit firms not managing earnings, but rather this is more attributable to loss firms engaging in upward manipulation. Furthermore, it is indicated that the discontinuity around the distribution of earnings change has also recently disappeared as firms reporting a small earnings decrease demonstrate similar earnings management behavior to those reporting a small earnings increase.
Research limitations/implications: This study is subject to the measurement error which is a common limitation in the earnings management literature.
Practical implications: The results suggest that the users should be aware that, in addition to firms that meet benchmarks by a slight margin, firms narrowly missing benchmarks are also involved in earnings management.
Originality/value: This study shows that the disappearance of the discontinuity around zero earnings and zero change in earnings should not be interpreted as a sign of no earnings management. It also explains how earnings management could have contributed to the disappearance of the discontinuities in earnings distribution.
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Accepted/In Press date: 5 February 2018
e-pub ahead of print date: 17 August 2018
Published date: 10 September 2018
Identifiers
Local EPrints ID: 417813
URI: http://eprints.soton.ac.uk/id/eprint/417813
PURE UUID: 764dc107-dc24-427b-8ae0-3cb96399d6ac
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Date deposited: 14 Feb 2018 17:30
Last modified: 16 Mar 2024 06:11
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Author:
Naser Makarem
Author:
Khaled. Hussainey
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