An alternative interpretation of the discontinuity in earnings distributions

William H. Beaver, Maureen F. McNichols, Karen K. Nelson

Review of Accounting Studies · 2007 · Volume 12 · Issue 4

Abstract

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.

Keywords

Earnings distributions, Special items, Income taxes, Earnings management

Enable JavaScript for citation tools and additional paper interactions.