Evidence that financing decisions contributed to the zero-earnings discontinuity

Naser Makarem; Frank Hong Liu; Lei Chen

doi:10.1007/s11156-022-01091-7

Evidence that financing decisions contributed to the zero-earnings discontinuity

Naser Makarem^* (Corresponding Author), Frank Hong Liu, Lei Chen

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

Abstract

In this paper we argue that financing decisions contribute to the zero-earnings discontinuity. We find a discontinuity in the distribution of earnings before tax and earnings before special items, but not in the distribution of earnings before interest which suggests that interest expense contributes to the zero-earnings discontinuity. We provide evidence that the impact of financing decisions on the earnings discontinuity can be explained by cost of financing. To investigate the role of interest expense in the zero-earnings discontinuity, we further show that
there was a discontinuity in the distribution of the level of debt issues around zero earnings contemporaneous with the zero-earnings discontinuity. We also show that the recent disappearance of zero-earnings discontinuity is coincident with the disappearance of the discontinuity in the debt issuance distribution. Overall, our findings suggest that the level of debt contributed to the zero-earnings discontinuity when it existed.

Original language	English
Journal	Review of Quantitative Finance and Accounting
Early online date	5 Sep 2022
DOIs	https://doi.org/10.1007/s11156-022-01091-7
Publication status	E-pub ahead of print - 5 Sep 2022

Keywords

financial reporting
earnings management
earnings distribution
earnings discontinuity
financing decisions

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Evidence that financing decisions contributed to the zero-earnings discontinuity

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