Intra-year shifts in the earnings distribution and their implications for earnings management

Previous findings that upward earnings management causes a kink in the distribution of annual earnings cannot be verified without a well-specified benchmark for pre-managed annual earnings. We model shifts in the cumulative earnings distribution during the fourth quarter to explain the kink's formation. Logistic regression results show that compared to a control group, a high proportion of firms with small cumulative profits or losses at the beginning of the fourth-quarter report small annual profits rather than small annual losses. This suggests that upward earnings management causes the kink and indicates which firms are likely to manage earnings upward. (C) 2007 Elsevier B.V. All rights reserved.