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Earnings management in the aftermath of the zero-earnings discontinuity disappearance

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Earnings management in the aftermath of the zero-earnings discontinuity disappearance. / Makarem, Naser; Hussainey, Khaled; Zalata, Alaa.

In: Journal of Applied Accounting Research, Vol. 19, No. 3, 17.08.2018, p. 401-422.

Research output: Contribution to journalArticlepeer-review

Harvard

Makarem, N, Hussainey, K & Zalata, A 2018, 'Earnings management in the aftermath of the zero-earnings discontinuity disappearance', Journal of Applied Accounting Research, vol. 19, no. 3, pp. 401-422. https://doi.org/10.1108/JAAR-03-2017-0047

APA

Vancouver

Author

Makarem, Naser ; Hussainey, Khaled ; Zalata, Alaa. / Earnings management in the aftermath of the zero-earnings discontinuity disappearance. In: Journal of Applied Accounting Research. 2018 ; Vol. 19, No. 3. pp. 401-422.

Bibtex

@article{4ca31b065d9f4fbf9f5eed78365b5f98,
title = "Earnings management in the aftermath of the zero-earnings discontinuity disappearance",
abstract = "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.",
keywords = "financial reporting, earnings management, accruals management, real activities manipulation, earnings distribution, earnings discontinuity",
author = "Naser Makarem and Khaled Hussainey and Alaa Zalata",
year = "2018",
month = aug,
day = "17",
doi = "10.1108/JAAR-03-2017-0047",
language = "English",
volume = "19",
pages = "401--422",
journal = "Journal of Applied Accounting Research",
issn = "0967-5426",
publisher = "Emerald Group Publishing Ltd.",
number = "3",

}

RIS

TY - JOUR

T1 - Earnings management in the aftermath of the zero-earnings discontinuity disappearance

AU - Makarem, Naser

AU - Hussainey, Khaled

AU - Zalata, Alaa

PY - 2018/8/17

Y1 - 2018/8/17

N2 - 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.

AB - 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.

KW - financial reporting

KW - earnings management

KW - accruals management

KW - real activities manipulation

KW - earnings distribution

KW - earnings discontinuity

U2 - 10.1108/JAAR-03-2017-0047

DO - 10.1108/JAAR-03-2017-0047

M3 - Article

VL - 19

SP - 401

EP - 422

JO - Journal of Applied Accounting Research

JF - Journal of Applied Accounting Research

SN - 0967-5426

IS - 3

ER -

ID: 8683414