There isextensiveevidenceofdiscontinuitiesindistributionsofreportedearningsatprominentearningsbenchmarks,
where distributionscomprisefewerobservationsimmediatelybelowthebenchmarkandmoreobservationsimmediately
abovethebenchmarkthanareexpectedifthedistributionissmooth.1 For example, Burgstahler andDichev(1997,hereafter
BD) show thatdistributionsofscaledearningsexhibitdiscontinuitiesatzero.Inaddition,BDdocumentthatthestrengthof
discontinuities varieswiththecostsandbenefitsofmeetingbenchmarks.Thisevidenceiswidelyinterpretedasconsistent
with thetheorythatmanagerstakebothrealandaccountingactionstoavoidlosses.Thisinterpretationisfurthersupported