Earnings Management? The Shapes of the Frequency Distributions of Earnings Metrics Are Not Evidence Ipso Facto

Abstract

We provide evidence that the shapes (particularly around zero) of the frequency distributions of earnings metrics examined in the extant earnings management literature are affected by (1) deflation (using, for example, price or market capitalization), (2) sample selection criteria that lead to differential inclusion/exclusion of observations to the left of zero versus observations to the right of zero (implicit in studies focusing on firms followed by I/B/E/S and explicit in studies partitioning on a variable differing between loss observations and profit observations), (3) differences between the characteristics of observations to the left of zero and observations to the right of zero (such as market pricing and analyst optimism/pessimism), or (4) a combination of these factors. Since the shapes of the frequency distributions of earnings metrics at zero are likely due to one of the above effects, we conclude that the shapes cannot be used as ipso facto evidence of earnings management. Copyright 2005 The Institute of Professional Accounting, University of Chicago.

Engaging in Earnings Management to Avoid Negative Earnings

“…Earnings management conducted firm not only to meet debt covenant contract, political cost, and bonus plan hypothesis but also to avoid losses or to meet zero earnings threshold. This evidence is consistent with studies of Hayn (1995), Burgstahler & Dichev (1997), Durtschi & Easton (2005), and Beaver, McNichols, & Nelson (2003). Most of literatures on earnings management are always related to events such: IPO, debt contracts, tax payment or financial restructuring.…”

Small-sized companies' earnings management: evidence from Italy

“…Durtschi and Easton, 2005;Durtschi and Easton, 2009;Holland, 2004;McNichols, 2003). One of the more critical and debated issues refers to the deflator.…”

Do Ownership Structure Characteristics Affect Italian Private Companies’ Propensity to Engage in the Practices of “Earnings Minimization” and “Earnings Change Minimization”?

“…Although it is not free from criticism in the literature (e.g. Beaver, McNichols, & Nelson, 2007;Dechow, Richardson, & Tuna, 2003;Durtschi & Easton, 2005, 2009Holland, 2004;Lahr, 2014;McNichols, 2003), it has been widely used to detect the presence of earnings management practices (e.g. Baber & Kang, 2002;Beatty, Ke, & Petroni, 2002;Brown & Caylor, 2004;Burgstahler & Dichev, 1997;Collins, Pincus, & Xie, 1999;Coppens & Peek, 2005;Daske, Gebhardt, & McLeay, 2006;Degeorge, Patel, & Zeckhauser, 1999;Easton, 1999;Gore, Pope, & Singh, 2007;Hamdi & Zarai, 2012;Hayn, 1995;Holland & Ramsay, 2003;Jacob & Jorgensen, 2007;Kerstein & Rai, 2007;Marques et al, 2011;Moreira, 2006;Phillips, Pincus, Rego, & Wan, 2004;Poli, 2013aPoli, , 2013bRevsine, Collins, Johnson, & Mittelstaedt, 2009).…”