An Alternative Interpretation of the Discontinuity in Earnings Distributions
55 Pages Posted: 20 Jan 2004
Date Written: June 2006
Abstract
We show that the asymmetric effects of income taxes and special items for profit and loss firms contribute substantially 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 management, earnings distributions, conservatism, taxes
JEL Classification: M41, M43, G10, C89, H25
Suggested Citation: Suggested Citation
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