An Analysis of the Reasons for the Asymmetries Surrounding Earnings Benchmarks

Abstract

Please enter abstract text here.Several studies report an asymmetry in the distribution of earnings around specified benchmarks (Hayn 1995; Burgstahler and Dichev 1997; Degeorge et al. 1999; Brown and Caylor 2005). Doubt has arisen over whether the observed kink in the distribution of earnings is solely caused by earnings management (Dechow et al. 2003; Coulton et al. 2005; Beaver et al. 2006 and Durtschi and Easton 2005). We use a ratio analysis approach to examine a range of specific accruals for earnings management. We find little evidence that firms immediately above the benchmark have abnormal receivables, inventories or provisions. However, they do increase cash-from-customers and reduce inventory. Thus our results support the recent research that suggests firms engage in real actions to meet earnings benchmarks (Ewert and Wagonhofer 2006; Graham et al. 2005, Roychowdhury 2006).

Keywords: Earnings benchmarks, earnings management, ratio analysis, direct cash flows

JEL Classification: C89, G10, M41