Intra-Year Shifts in the Earnings Distribution and Implications for Earnings Management*

Abstract

We extend the earnings distribution-based approach to explain the kink in the annual earnings distribution by examining its evolution. Our analyses fail to confirm prior research implications that the kink develops when firms facing smallest year-to-date losses abnormally shift into the smallest profit interval. We find the primary abnormal tendency by firms during the development of the kink is to remain in the smallest profit interval, rather than to move into a higher earnings interval. This suggests that firms avoiding smallest losses most likely prevent year-to-date profits from turning into annual losses rather than converting year-to-date losses into annual profits.

Keywords: Earnings management, earnings distribution, losses

JEL Classification: M4, L14, C89