An alternative interpretation of the discontinuity in earnings distributions

We show that the asymmetric effects of income taxes and special items for profit and loss firms contribute 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...

Full description

Saved in:
Bibliographic Details
Published in:Review of accounting studies 2007-12, Vol.12 (4), p.525-556
Main Authors: Beaver, William H., McNichols, Maureen F., Nelson, Karen K.
Format: Article
Language:English
Subjects:
Earnings management
Income distribution
Income taxes
Mathematical models
Net income
Studies
Tax rates
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We show that the asymmetric effects of income taxes and special items for profit and loss firms contribute 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. [PUBLICATION ABSTRACT]
ISSN:1380-6653
1573-7136
DOI:10.1007/s11142-007-9053-0