Evidence that financing decisions contribute to the zero-earnings discontinuity
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.
History
School
- Business and Economics
Department
- Business
Published in
Review of Quantitative Finance and AccountingVolume
60Issue
1Pages
231 - 257Publisher
SpringerVersion
- VoR (Version of Record)
Rights holder
© The AuthorsPublisher statement
This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.Acceptance date
2022-07-25Publication date
2022-09-05Copyright date
2022ISSN
0924-865XeISSN
1573-7179Publisher version
Language
- en