Do Manufacturing Firms Mangage Nonoperating Costs to Exceed the Earnings Benchmark of Zero?

• In Event: Breakfast with Research Roundtable Forum Session
  In Roundtable: Roundtable 6

Abstract

Burgstahler and Dichev (1997), hereafter BD, and others document unusually low frequencies of small losses and unusually high frequencies of small positive incomes and regard this as evidence of earnings management. Others have searched for other evidence of earnings management surrounding the benchmark. This study investigates whether firms use the nonoperating component of earnings to meet the earnings benchmark of zero, i.e., to avoid reporting small losses. The methodology involves comparing the earnings intervals of the firms with net income just above and just below zero, with the earnings intervals of the same firms with with earnings measured as operating income. It seems that firms do use the nonoperating components of earnings to meet the earnings benchmark of zero.

Author

• Steven C Hall, University of Nebraska- Kearney