Earnings distributions commonly exhibit statistically significant discontinuities at prominent performance benchmarks. Discontinuities at zero earnings are widely interpreted as evidence of earnings management to avoid a loss, and discontinuities at zero change or zero earnings surprise are interpreted as evidence of management to avoid an earnings decrease or negative earnings surprise, respectively. In contrast, two recent papers by Durtschi and Easton (2005, 2009) assert that discontinuities are explained by some combination of prior researchers' choice(s) of sample selection and scaling as well as a systematic relation between the sign of earnings and market prices. Resolution of the conflicting interpretations of discontinuities is important because 1) it may affect how investors, regulators, and scholars view earnings management and 2) it demonstrates the importance of theory and proper research design choices in earnings measurement research. We show that the commonly observed discontinuities are not due to scaling or selection or the correlation between earnings and price. Rather, the exceptions to discontinuity reported by Durtschi and Easton are explained by research design flaws that predictably reduce or eliminate the significance of discontinuities. Thus, earnings management remains the only plausible explanation for the extensive body of evidence showing discontinuities in earnings distributions.
| Speaker: | Dr David Burgstahler Julius A Roller Professor of Accounting, University of Washington |
| When: |
10.30 am - 12.00 pm |
| Venue: | School of Accountancy [Map] Level 4, Meeting Room 4.1 |
| Contact: | Office of the Dean Email: SOAR@smu.edu.sg |
