Do Working Hours Explain Earnings Management and Discontinuities in Reported Earnings?

• In Event: Earnings Management

Abstract

Discontinuities in reported earnings distributions at zero have been widely used as evidence of earnings management but not completely without controversy. In this study, we
examine the alternative explanation that more reference-dependent work explains the large number
of firms just reporting small profits and avoiding small losses. We firstly find that individual firms
in the United States with higher working hours as well as countries with higher working hours
engage in less earnings management to avoid losses. Our second finding is that earnings
discontinuities are smaller for firms with high working hours and for firms in hard working
countries. As such, we contribute with a deeper examination of the previously debated evidence
of earnings discontinuities.

Author

• Dennis Sundvik, Hanken School of Economics