There is extensive evidence of discont in uitiesindistributions of reported earnings at prominent earnings benchmarks,
where distributions comprise fewerobser vations immediately below the benchmark and more observations immediately
above the benchmark than are expected if thedistribution is smooth.1 For example, Burgstahler and Dichev(1997,hereafter
BD) show that distributions of scaled earnings exhibit discontinuities at zero.Inaddition,BDdocument that the strength of
discontinuities varies with the costs and benefits of meeting benchmarks.This evidence is widely interpreted as consistent
with the theory that managers take both real and accounting actions to avoid losses.