Download or read book Discontinuity in Earnings Distributions written by Wei Li and published by . This book was released on 2015 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a model of financial reporting in which investors infer both pre-managed earnings and the precision of earnings from reported earnings. Over-reporting earnings has two opposing pricing effects: investors infer higher pre-managed earnings from an inflated positive earnings surprise (i.e., positive effect); however, investors also infer a lower earnings precision, leading to a lower pricing weight placed on the higher surprise (i.e., negative effect). For firms with strongly positively autocorrelated earnings, the trade-off between the two opposing effects creates a pooled report right above the prior mean of the earnings distribution and a no-reporting quot;holequot; right below the prior mean in equilibrium (i.e., an earnings discontinuity consistent with empirical findings). The model also predicts: (1) no earnings discontinuity exists for firms with negatively or weakly positively autocorrelated earnings, and (2) the earnings discontinuity is more pronounced for firms with more positively autocorrelated earnings. The empirical evidence supports the two predictions.
Download or read book An Alternative Interpretation of the Discontinuity in Earnings Distributions written by William H. Beaver and published by . This book was released on 2007 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book The Time series and Cross section of the Discontinuity in Earnings Distribution written by and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Discontinuities of Earnings and Earnings Change Distributions After J SOX Implementation written by Masahiro Enomoto and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Earnings Management Alternative Explanations for Observed Discontinuities in the Frequency Distribution of Earnings Earnings Changes and Analyst Forecast Errors written by Cindy Durtschi and published by . This book was released on 2005 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: The discontinuities at zero in the frequency distributions of reported net income (deflated by beginning-of-period market capitalization), deflated change in net income, I/B/E/S quot;actualquot; earnings, and analysts' forecast errors are the most widely cited evidence of earnings management. We provide evidence consistent with alternative explanations for each of these discontinuities. We show that firms reporting small losses are priced significantly differently from firms that report small profits. An effect of this difference in pricing is that earnings to the left of zero are deflated by significantly different denominators than earnings to the right of zero inducing a discontinuity in the distributions of deflated net income and deflated changes in net income at zero. We also show that sample selection criteria may contribute to the discontinuity in these distributions as well as the discontinuity in I/B/E/S actual earnings. Finally, the presumption in the literature which focuses on the discontinuity at zero in the distribution of analysts' forecasts errors is that earnings are managed to meet or beat analysts' forecasts. We provide an alternative explanation: the discontinuity is caused by the fact that analysts' forecast errors tend to be much greater when the forecasts are optimistic than when they are pessimistic. This tendency leads to more small positive forecasts errors (pessimistic forecasts) than small negative forecast errors (optimistic forecasts).
Download or read book Earnings Management in the Aftermath of the Zero Earnings Discontinuity Disappearance written by Naser Makarem and published by . This book was released on 2019 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book Mixture and Continuous Discontinuity Hypotheses written by Andrew Yim and published by . This book was released on 2014 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: A parsimonious model is developed to understand two perplexing, salient features of the distributions of earnings, earnings change, and earnings surprise. The model provides guidance for empirical work to uncover the unmanaged earnings important to firm valuation and public scrutiny, yet unobserved by outside parties. Simulation results based on the model show that the puzzling volcano shape of the distributions can arise from the mixture of a spiky distribution of managed earnings with a bell-shaped distribution of unmanaged earnings. The spiky distribution is due to cookie-jar earnings management that compresses unmanaged earnings from both sides toward an earnings benchmark, leading to a concentration of density around there. The mixture is due to the auditor's adjustment decision, which seems stochastic from the public's or client firm's perspective. Additional simulation results suggest that the widely documented discontinuity in the distributions can be partly due to a steep increase in density appearing like a discontinuity when a continuous distribution is plotted in terms of frequency counts in histogram bins. The main analytical results are a general characterization of the optimal earnings management strategy and the derivation of closed-form solutions for particular functional form assumptions. Potential applications include structurally estimating the model for policy analysis to assess the impact on earnings manipulation.
Download or read book Discontinuity of Earnings and Earnings Changes Distribution After J SOX Implementation written by Tomoyasu Yamaguchi and published by . This book was released on 2015 with total page 15 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Discontinuity in Earnings Reports and Managerial Incentives written by Tatiana Valerievna Fedyk and published by . This book was released on 2007 with total page 160 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book The Distribution of Wealth written by John Bates Clark and published by . This book was released on 1899 with total page 490 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Discontinuity in Earnings Report and Managerial Incentives written by Tatiana Fedyk and published by . This book was released on 2007 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides a rational explanation for earnings discontinuity in the context of the agency model. A company manager often possesses private information about the project's expected return. This information is valuable to the firm because early warning that a project is unlikely to succeed allows the firm to fire the manager and to discontinue a project with an expected loss.When issuing a report, the manager can choose to engage in real earnings management and report higher-than-actual earnings for the current period, but as a result, the overall expected cash flow from the project will be undermined. The only way to extract the manager's private information is to offer him a generous severance payment as compensation for disclosing bad news. It is shown that any optimal contract induces overinvestment and earnings management.Furthermore, discontinuity in earnings reports arises endogenously under most circumstances. For a linear cost of misreporting, the paper presents the closed-form solution for the optimal contract and shows that the existence of an area of discontinuity in the earnings report depends negatively on the firm size and positively on the cost of managerial effort. These results are in line with empirical studies on discontinuity in earnings and executive severance agreements.
Download or read book A Theory of Earnings Distribution written by Robert Weizsäcker and published by Cambridge University Press. This book was released on 1993-09-16 with total page 270 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides an understanding of the origins of earnings distributions.
Download or read book An Improved Test for Earnings Management Using Kernel Density Estimation written by Henry Lahr and published by . This book was released on 2015 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper improves methods developed by Burgstahler and Dichev (1997) and Bollen and Pool (2009) to test for earnings management by identifying discontinuities in distributions of scaled earnings or earnings forecast errors. While existing methods use preselected bandwidths for kernel density estimation and histogram construction, the proposed test procedure addresses the key problem of bandwidth selection by endogenizing the selection step using a bootstrap test. The main advantage offered by the bootstrap test over prior methods is that it provides a reference distribution that cannot be globally distinguished from the empirical distribution instead of assuming a correct reference distribution. This procedure limits the researcher's degrees of freedom and offers a simple procedure to find and test a local discontinuity. I apply the bootstrap density estimation to earnings, earnings changes, and earnings forecast errors in U.S. firms over the period 1976-2010. Significance levels found in earlier studies are greatly reduced, often to insignificant values. Discontinuities cannot be detected in analysts' forecast errors, while such findings of discontinuities in earlier research can be explained by a simple rounding mechanism. Earnings data show a large drop in loss aversion after 2003 that cannot be detected in changes of earnings.
Download or read book What Have We Learned About Earnings Management Integrating Discontinuity Evidence written by David Burgstahler and published by . This book was released on 2015 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: The accounting literature includes numerous examples of discontinuities at prominent benchmarks that are widely interpreted as evidence that earnings are managed to meet those benchmarks. However, there are also a few examples where discontinuities do not exist, which are sometimes interpreted as inconsistent with earnings management. There are also several suggested alternative explanations for discontinuities. This paper reviews and integrates the various elements of the body of discontinuity-related evidence.
Download or read book Earnings quality and earnings management written by Sanjay Wikash Bissessur and published by Rozenberg Publishers. This book was released on 2005 with total page 217 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Earnings Management and Corporate Finance written by Joanna Lizińska and published by Taylor & Francis. This book was released on 2024-07-01 with total page 235 pages. Available in PDF, EPUB and Kindle. Book excerpt: In today's dynamic landscape of accounting, corporate finance, and business management, earnings management has assumed paramount importance. Transparent and reliable accounting information is crucial for accurate corporate performance forecasting and financial decision-making. This book uniquely discusses practical earnings management methods within the accounting and taxation realms. It is supported by extensive international evidence linking informativeness of financial reports to companies’ financial decisions. Delving into the earnings management process, this book provides profound insights into how profits can be influenced through accounting choices and real business transactions. Real-life case studies will undoubtedly facilitate the understanding of accounting and taxation methods. Additionally, it unravels key elements of corporate finance puzzles related to the transparency of financial reports, including the macroeconomic environment, profit thresholds, cash management, audit quality, financing decisions, and financial health. With broad empirical evidence from various European countries, it multidimensionally explores the important link between the quality of information in financial statements and trade-offs behind financial decisions. The book serves as a valuable reference for international researchers in corporate finance, accounting, and corporate governance. It is also a powerful tool for business practitioners, including owners, lenders, auditors, regulatory and professional bodies, business partners, or other market participants. For those seeking the latest insights on earnings management, those producing or assessing accounting information, and those using financial reports in their research or business practice, this book is a must-read.
Download or read book Regression Discontinuity Designs written by Juan Carlos Escanciano and published by Emerald Group Publishing. This book was released on 2017-05-11 with total page 539 pages. Available in PDF, EPUB and Kindle. Book excerpt: Volume 38 of Advances in Econometrics collects twelve innovative and thought-provoking contributions to the literature on Regression Discontinuity designs, covering a wide range of methodological and practical topics such as identification, interpretation, implementation, falsification testing, estimation and inference.
