2005/07/26 by CINDY DURTSCHI, Cindy Durtschi, Peter D. Easton +1 · 398 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Accounting #Auditing, Earnings Management, Governance #Business #De facto #Earnings #Earnings management #Econometrics #Economics #Financial Markets and Investment Strategies #Financial Reporting and Valuation Research #Political science
paper · doi:10.1111/j.1475-679x.2005.00182.x
published in Journal of Accounting Research 43(4), 557-592 (Wiley)
openalex publication_date 2005/07/26 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/31
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.