An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Atul Rai
University of Alabama in Huntsville

Joseph Kerstein
Baruch College City University of New York

Abstract: We reexamine previous research implications drawn from the kink in annual earnings changes distribution that earnings are managed up to avoid annual earnings declines. By examining the intra-period evolution in the earnings change distribution leading up to the kink, we are able to identify the quarter when the kink evolves and whether firm movements during that period are consistent with earnings management to avoid negative earnings changes. We find no evidence that firms experiencing the smallest earnings decline prior to the kink’s development managed earnings upward during the 1977-1994 period. Instead, we find that firms already having year-to-date smallest earnings increases abnormally remain in that interval during the kink’s development, suggesting that these firms take actions to prevent a decline in annual earnings. For the 1995-2004 period we find that the kink in the annual earnings change distribution has disappeared suggesting a change in reporting priorities of man

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