TY - UNPB

T1 - Earnings management and the distribution of earnings relative to targets: UK evidence

AU - Singh, A

AU - Gore, J P O

AU - Pope, P F

PY - 2002

Y1 - 2002

N2 - In this paper we provide the first international evidence on discontinuities in the distribution of reported earnings, using a large sample of UK firms. We examine the discontinuity phenomenon in the context of earnings management. We report that the empirical distributions of earnings before discretionary working capital accruals does not reflect the unusually high frequencies of small surpluses and unusually low frequencies of small deficits relative to targets found in the distribution of actual (reported) earnings, i.e. after discretionary working capital accruals. We find that discretionary working capital accruals have the effect of significantly increasing the frequencies of firms achieving earnings targets both overall and by small margins. Thus, we document an explicit link between working capital accruals-based earnings management and the discontinuities observed in the empirical distribution of earnings relative to targets.

AB - In this paper we provide the first international evidence on discontinuities in the distribution of reported earnings, using a large sample of UK firms. We examine the discontinuity phenomenon in the context of earnings management. We report that the empirical distributions of earnings before discretionary working capital accruals does not reflect the unusually high frequencies of small surpluses and unusually low frequencies of small deficits relative to targets found in the distribution of actual (reported) earnings, i.e. after discretionary working capital accruals. We find that discretionary working capital accruals have the effect of significantly increasing the frequencies of firms achieving earnings targets both overall and by small margins. Thus, we document an explicit link between working capital accruals-based earnings management and the discontinuities observed in the empirical distribution of earnings relative to targets.

KW - accounting manipulation

KW - discretionary accruals

KW - earnings management.

M3 - Working paper

T3 - Accounting and Finance Working Paper Series

BT - Earnings management and the distribution of earnings relative to targets: UK evidence

PB - The Department of Accounting and Finance

CY - Lancaster University

ER -