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

John Jacob
University of Colorado at Boulder

Bjorn N. Jorgensen
Columbia University

Abstract: Quarterly earnings allow aggregation into annual earnings in four different ways. We provide evidence on earnings management in fiscal year earnings relative to three alternative measures of firms’ annual earnings.

We confirm prior findings in Burgstahler and Dichev (1997) of discontinuities around zero and around prior year earnings in histograms of fiscal year earnings. Subsequent research questions whether these discontinuities are evidence of earnings management or whether they are attributable to biases induced by taxes, scaling and sample selection. Using the histograms of our alternative annual earnings measures, we offer additional evidence in this debate.

We also examine the statistical properties, such as variance, skewness and kurtosis, of annual earnings computed in these four different ways. We attempt to discriminate between earnings management and the settling up phenomenon as explanations for systematic differences in these properties.

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