Previous findings that upward earnings management causes a kink in the distribution of annual
earnings cannot be verified without a well-specified benchmark for pre-managed annual earnings. We
model shifts in the cumulative earnings distribution during the fourth quarter to explain the kink’s
formation. Logistic regression results show that compared to a control group, a high proportion of
firms with small cumulative profits or losses at the beginning of the fourth-quarter report small
annual profits rather than small annual losses. This suggests that upward earnings management
causes the kink and indicates which firms are likely to manage earnings upward.