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An alternative interpretation of the discontinuity in earnings distributions

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  • William H. Beaver

    (Stanford University)

  • Maureen F. McNichols

    (Stanford University)

  • Karen K. Nelson

    (Rice University)

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.

Suggested Citation

  • William H. Beaver & Maureen F. McNichols & Karen K. Nelson, 2007. "An alternative interpretation of the discontinuity in earnings distributions," Review of Accounting Studies, Springer, vol. 12(4), pages 525-556, December.
    • Handle: RePEc:spr:reaccs:v:12:y:2007:i:4:d:10.1007_s11142-007-9053-0
    DOI: 10.1007/s11142-007-9053-0
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    References listed on IDEAS

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    Cited by:

    1. Richard Frankel & William J. Mayew & Yan Sun, 2010. "Do pennies matter? Investor relations consequences of small negative earnings surprises," Review of Accounting Studies, Springer, vol. 15(1), pages 220-242, March.
    2. Theodore E. Christensen, 2008. "Discussion of “Evidence of differing market responses to beating analysts’ targets through tax expense decreases”," Review of Accounting Studies, Springer, vol. 13(2), pages 319-326, September.
    3. Patricia M. Fairfield & Karen A. Kitching & Vicki Wei Tang, 2009. "Are special items informative about future profit margins?," Review of Accounting Studies, Springer, vol. 14(2), pages 204-236, September.

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