Is there something rotten in Denmark? Earnings management to avoid small losses.

Abstract

This study focuses on earnings management by investigating the frequency distribution of the reported earnings in a European country. In particular, the relation between main “manageable” elements of working capital and reported earnings is examined. The modified and extended Jones model is used to identify and separate discretionary accruals in order to identify pre-managed earnings. By comparing the frequency distribution of these calculated pre-managed earnings and the reported earnings, it is shown that the combination of the research of earnings management based on studies of irregularities in the earnings frequency distribution and studies of discretionary accruals can be a powerful approach to examining the existence of earnings managementDiscretionary accruals; Earnings management; Frequency distribution; Reported Earnings;