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The authors propose an alternative robust technique to test for discontinuities in distributions and provide consistent evidence of discontinuities around zero for both scaled and unscaled earnings levels and changes. The advantage of the proposed test is that it does not rely on arbitrary choice of bin width choices.

To evaluate the power of the test, the authors examine the density function of non-discretionary earnings and detect no evidence of discontinuities around zero in levels and changes of these non-discretionary earnings. As robustness, the authors use pre-managed earnings excluding accrual and real manipulation and find similar evidence.

The finding using our technique support the Burgstahler and Dichev (1997) interpretation on earnings management, even for smaller sample sizes and reject the theory that discontinuities arise from scaling and sampling methods.

The study provides an overview of those studies that support and those that oppose using “testing for discontinuities” as a way to examine earnings management. The authors advance the literature by providing an alternative methodology supporting the view that the kink in the distribution represents earnings management.

The purpose of this paper is to investigate earnings management by firms reporting a small profit or a small loss after the recent evidence that the discontinuity around zero earnings has disappeared.

Using a large sample of US firms for the period 2002–2011, regression analysis and earnings distribution approach are employed to examine the earnings management of small-profit and small-loss firms in terms of both accruals management and real activities manipulation.

The results suggest that both small-profit and small-loss firms are engaged in upward manipulation of accruals and real activities. This implies that failure to document a difference between firms to the right and left of zero by prior studies is not due to small-profit firms not managing earnings, but rather this is more attributable to loss firms engaging in upward manipulation. Furthermore, it is indicated that the discontinuity around the distribution of earnings change has also recently disappeared as firms reporting a small earnings decrease demonstrate similar earnings management behaviour to those reporting a small earnings increase.

This study is subject to the measurement error which is a common limitation in the earnings management literature.

The results suggest that the users should be aware that, in addition to firms that meet benchmarks by a slight margin, firms narrowly missing benchmarks are also involved in earnings management.

This study shows that the disappearance of the discontinuity around zero earnings and zero change in earnings should not be interpreted as a sign of no earnings management. It also explains how earnings management could have contributed to the disappearance of the discontinuities in earnings distribution.

Previous research in auditing has used the probability of small profits or losses as a measure of audit quality. The purpose of this paper is to investigate the validity of the underlying assumption in prior audit literature that auditing mitigates clients’ inclination towards loss avoidance and to shed light on the debate regarding earnings discontinuity.

This paper compares the discontinuity in earnings distribution around zero, both before and after auditing.

Using a unique data set that contains both recorded and waived adjustments, the authors find that audit adjustments do not reduce the discontinuity in earnings distribution around zero.

The results advise caution in using the probability of small profits or losses as a measure of audit quality. The findings suggest the discontinuity in earnings around zero may not be caused by loss avoidance achieved through accounting misreporting, which falls under the purview of auditing.

This research makes unique contributions beyond those of prior studies. By incorporating waived adjustments, the authors are able to conduct more comprehensive tests and explore richer details of audit adjustments that were not available in previous studies. The proportion of losses in this study's sample aligns with that in prior US research, which enhances the generalisability of the authors’ findings and minimizes the influence of inherent discrepancies in auditors' motivations to curb loss avoidance.

The purpose of this paper is to investigate the spillover effects of a bright-line disclosure regulation that required Chinese listed firms to provide earnings forecasts if they anticipated specified, large earnings changes.

The paper examines the discontinuity of the earnings change distribution of firms listed on the Shenzhen Stock Market between 2010 and 2014. The paper finds that firms no longer subject to the bright-line test still exhibited discontinuity in earnings change distribution. The discontinuity lasted for at least three years with magnitude comparable to that of the firms still subject to the bright-line test. In addition, newly listed firms that had never experienced the bright-line test showed similar tendency to avoid the same threshold. There is some evidence that these firms’ avoidance of the −50 per cent changes was partly because of market pressure.

Research on bright-line tests has to date focused on their immediate and direct effects on firms currently subject to such tests. This study finds that a bright-line disclosure regulation’s influence is not limited to the firms directly governed by the regulation. It could lead to widespread and long lasting distortions in financial reporting behaviors of firms not currently subject to such tests.

The paper has implications for regulators who study the economic consequences of bright-line regulations in general and analysts of the Chinese capital market in particular.

This is the first empirical report that bright-line disclosure regulations affected the financial reporting behavior of firms that were not directly subject to the bright-line tests.

The purpose of this paper is to examine whether Egyptian listed firms engage in earnings management to meet or beat earnings thresholds, particularly, earnings level (avoiding losses) threshold and earnings change (avoiding earnings decreases) threshold.

The paper uses the distribution of reported earnings approach, similar to Burgstahler and Dichev, to examine discontinuities around earnings thresholds as evidence on earnings management to meet or beat earnings thresholds.

The research findings reveal that there is a discontinuity in the distribution of reported earnings and earnings changes of Egyptian listed firms surrounding zero. There are too few observations immediately below zero and too many observations immediately above zero. These results suggest that Egyptian listed firms tend to engage in earnings management to avoid reporting losses and avoid reporting earnings decreases.

The paper's main limitation is the relatively small sample size given the thinness of the Egyptian capital market, therefore, the findings should be interpreted with caution.

The paper contributes to the literature by examining earnings management to meet or beat earnings thresholds in Egypt as one of the emerging markets.

Charting the earnings numbers reported by Korean firms produces a bell curve, but for a sharp discontinuity in the area surrounding zero. The purpose of this paper is to investigate if and how a large segment of Korean managers might manage accounting numbers to produce the observed result.

This study adopts an empirical research method using Korean listed firms as a sample. The primary focus of investigation is on major income statement variables that might produce the observed results in earnings from operations and net income.

Managers of Korean firms opportunistically use almost all income statement variables to influence earnings numbers. They manage revenues and selling, general & administrative expenses to report small positive earnings from operations, but manage non-operating gains (losses) to report small positive net income.

This paper does not answer several questions related to loss avoidance. First, the paper did not examine which actions, such as discretionary accruals, opportunistic business decisions, or bogus transactions, were employed to affect line items on the income statement. Second, the paper did not investigate what specific incentives trigger Korean managers to report small positive earnings. Korean firms have traditionally raised capital by borrowing funds from creditors and governmental agencies. Thus, they may be concerned that reporting losses would reduce their borrowing capacity. Finally, corporate governance, such as CEO tenure and option grants may influence the extent of earnings management to avoid losses, but most corporate governance data for Korean companies must be manually collected. Accordingly, these subjects are left for future studies as well.

This study contributes to accounting literature by reporting how managers of Korean firms artificially coordinate major income statement variables and report small positive earnings figures, noting the differences between earnings management investigating methodology and ones used in previous studies.

The paper aims to clarify the relationship between earnings management and the sale of long‐lived assets and investments for firms listed in Taiwan. In addition, it suggests several interesting issues for further studies by proposing that positive earnings are one of the necessary conditions for the companies to issue bonds or new shares.

The paper uses archival data and regression analysis to document empirical evidence that assets sales are one of the methods to manipulate reported earnings among 12,484 firm‐years over the period of 1984‐2006.

The paper finds that approximately 54‐57 percent of firms in Taiwan with small pre‐managed earnings losses manipulate reported earnings to show small positive earnings. This is in contrast to 30‐40 percent of firms in the USA as reported by Burgstahler and Dichev.

The paper makes a good use of the unique institutional features of Taiwan. It has not produced other unique results that differ significantly from the findings of prior studies.

The paper shows that reported earnings are viewed as a primary measure of firm performance and mechanisms behind earnings management have important implications in deriving informative summary measures of firm performance.

The paper fulfils an identified need to study how companies listed in Taiwan to beat thresholds by selling long‐lived assets and investments and provides a comparison in earnings management with US companies. Moreover, it provides several suggestions for future studies.

The authors emphasize the information role of earnings management and how it may be used to “mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers.” Specifically, the authors examine the causal effect of tax incentives on private firms' earnings management based on a corporate tax reform in China.

In December 2001, China implemented a tax collection reform which moved the collection of corporate income taxes from the local tax bureau to the state tax bureau. This reform results in exogenous variations in the effective tax rate among similar firms established before and after 2002. The authors apply a regression discontinuity design and use the generated variation in the effective tax rate to investigate the impact of taxes on firm earnings management.

The authors find that tax reduction substantially increases private firms' incentives to manage earnings information, and such effect is particularly pronounced when tax collection intensity and government interventions are low. Further evidence shows that lower tax rates stimulate firms' investment, inventory turnover and recruitment of skilled human capital. A plausible mechanism is that private firms signal a promising outlook by managing earnings to attain greater financing and improve investment/operation levels when financial constraints are removed.

First, the authors present the causal effects of tax incentives on private firm's earnings management, which deepens the authors’ understanding on the determinants of firm's earnings information production. Second, this study also contributes to the literature on tax-induced earnings management. Third, the authors believe that this topic offers clear policy implications and would be of particular interest to regulators.

In 2001 Enron filed amended financial statements setting off a chain of events starting with its bankruptcy filing and including the conviction of Arthur Andersen for obstruction of justice. The end of 2001 and the first half of 2002 included a heightened level of publicity for the accounting practices of listed companies. This paper addresses whether there was a detectable change in the incidence of earnings management around this time period. Earnings reports released in 2001 and 2002 were analyzed. The results showed that revenue numbers were subject to upwards management. Benford's Law was used to detect such manipulations. Earnings Per Share (EPS) numbers showed a marked discontinuity in the distribution around zero which is consistent with upwards management. The results also showed a tendency towards neat round EPS numbers such as 0.10, 0.20, etc. The overall results are consistent with a small but noticeable increase in earnings management in 2002. Enron's reported numbers are reviewed and these show a strong tendency towards making financial thresholds.

Compares three definitions of earnings management used by accounting researchers and three methods of estimating it: aggregate accruals, specific accruals and discontinuities in earnings distribution. Discusses evidence relating to the reasons for income‐increasing earnings management, income‐decreasing earnings management and specific contexts, e.g. financial institutions with regulatory constraints. Concludes that, although the evidence is limited, managers are more likely to manipulate income up rather than down; and identifies some opportunities for further research.