Earnings Management during the Fourth Quarter: Evidence from Taiwan

Abstract

ABSTRACTThis study aims to investigate earnings management during the fourth quarter and explains why there is a large kink in the distribution of annual earnings around zero. We use multinomial logistic regressions to investigate intra-year shifts in earnings distributions. Our empirical results support that managers of listed companies in Taiwan may manage earnings upward or keep their earnings during the fourth quarter to avoid small losses or decreases in earnings, when their earnings are slightly below or above zero after the first three quarters. Thus, auditors should pay more attention to the firms with cumulative earnings distribution surrounding zero at the end of the third quarter. However, we also demonstrate that some of the earnings maintenance or movement is due to the industry factor rather than earnings management. Meanwhile, the earnings management behavior seems less obvious since 2008, which may be due to the improvement of corporate governance.