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

Singh, Ashni K., Gore, Pelham and Pope, Peter (2007) Earnings management and the distribution of earnings relative to targets: UK evidence. Accounting and Business Research, 37 (2). pp. 123-149. ISSN 0001-4788

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Identification Number: 10.1080/00014788.2007.9730065

Abstract

In this paper we provide new 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 distribution 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. We also examine earnings management before and after the issuance of FRS 3 ‘Reporting Financial Performance’ and find evidence that FRS 3 altered earnings management strategies adopted by companies.

Item Type: Article
Additional Information: © 2007 The Authors
Divisions: Accounting
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc.
Sets: Departments > Accounting
Date Deposited: 23 Oct 2013 13:03
Last Modified: 20 May 2020 01:51
URI: http://eprints.lse.ac.uk/id/eprint/53754

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