기업들은 소액의 적자가 예상될 때 양의 이익조정을 통해 이를 소액의 흑자로 보고하려고 한다. 이로 인해 소액의 적자보고에 비해 소액의 흑자보고가 비정상적으로 많아서 이익분포가 0에서 변형된다(Burgstahler and Dichev 1997). 이러한 적자회피보고 행태 때문에 어떤 연구는 소액의 흑자보고를 낮은 이익품질을 나타내는 지표로 보기도 한다. 그러나 Dechow, Richardson and Tuna (2003)는 이익분포의 변형이 적자회피 이익조정만으로 설명되지 않으며 보수적 회계처리를 비롯한 여러 가지 원인이 복합적으로 작용한 결과로 해석한다. 더욱이 Durtschi and Easton(2005)은 분포의 변형은 이익률(주당이익/주가) 분포에서만 나타나는 현상으로서, 주당이익에서는 변형이 확인되지 않는다고 한다. 이와 같이 소액의 흑자보고가 과연 적자회피 이익조정을 의미하는지는 실증적으로 입증되지 않았으므로 이를 일률적으로 적자회피 이익조정과 관련짓는 것은 부당하다. 일반적으로 인정되는 회계원칙은 미래의 불확실성을 안고 있는 경제적 사건에 대해 보수주의에 입각하여 회계처리 하도록 유도한다. 보수주의 회계선택은 이익분포를 흑자구간에서 0쪽으로 치우치게 할 수도 있다(Givoly and Hayn 2000). 이 연구는 소액 흑자보고와 보수주의 회계처리 간의 관계를 규명하여 이익분포가 변형되는 이유를 설명하였다. 연구결과에 따르면 주당이익이 소액의 흑자로 보고된 것은 이익을 증가시키는 조정과 관련되지만 이익률이 소액의 흑자로 보고된 것은 오히려 이익을 감소시키는 조정과 관련이 있는 것으로 확인되었다. 결국 소액의 흑자보고가 반드시 적자회피 이익조정을 나타내는 것은 아니며 경우에 따라서는 보수주의 회계처리와도 관련되므로 이를 신중히 고려하여 소액흑자보고의 의미를 해석해야 할 것이다.

It seems that firms have an incentive to claim success in achieving certain target earnings, even though the true performance is unsuccessful. In particular, firms who have failed to gain substantial revenue are eager to report even small profits. The news about the firms which are ``from loss to profit`` or ``from profit to loss`` attract public attention. When firms disclose their annual performance, the firm most likely to find itself in the spotlight may be the loss-reporting firm. Loss-reporting may threaten the going concern status of a firm due to negative prospects for future business. Therefore, firms try to manage earnings to transform loss to profit. Because there is much more small profit reporting than small loss reporting, earnings distribution is kinked at zero (Hayn 1995, Burgstahler and Dichev 1997, Degeorge et al. 1999, Song et al. 2004). Burgstahler and Dichev (1997) assert that a kink in earnings distribution at zero is related to earnings management for loss avoidance. Bhattacharya et al. (2003) and Leuz et al. (2003) interpret this phenomenon as earnings management for loss avoidance. They regard small profit reporting as an indicator of low earnings quality. However, the hypothesis that the kink in earnings distribution at zero is related to earnings management for loss avoidance has not been empirically proven until now. Furthermore, the kink in frequency distribution of earnings has been confirmed only in net income deflated by lagged market capitalization. Durtschi and Easton (2005) show that the frequency distribution of reported earnings per share does not show a discontinuity at zero. In fact, there are more firms that report a cent per share loss than a cent per share profit with a peak in the frequency distribution at zero cents per share. This suggests that the discontinuity observed in prior studies may be due to deflation rather than the properties of earnings per se. Dechow et al. (2003) investigate whether boosting of discretionary accruals to report a small profit is a reasonable explanation for this kink. However, they are unable to confirm that boosting of discretionary accruals is the key driver of the kink. They caution against the use of the ratio of small profit firms to small loss firms as a measure of earnings management and discuss a number of alternative explanations for the kink. They suggest that the kink can`t be explained only through earnings management for loss avoidance, but that other various reasons like conservative accounting need to be considered too. GAAP guide firms to choose conservative accounting in which the earnings and net assets are presented in smaller figures in the circumstance of high uncertainty in future economic results. A conservative selection of depreciation method makes the price-earnings ratio (PER) higher (Beaver and Dukes 1973). The high PER makes earnings per share deflated by price(E/P) lower, which means firms are concentrated on small profit interval in the distribution of E/P. Therefore, the kink in E/P distribution simply indicates a concentration of high PER firms in a small profit interval. This paper contributes to prior research by focussing on the relation between conservative accounting and small profit reporting to examine the reason why the earnings distribution is kinked. This paper investigates the following empirical questions; First, whether the firms of small profit reporting in EPS have the feature of loss avoidance earnings management? Second, what types of accounting treatments exist in the firms reporting small profit only in E/P, but not in EPS. To answer these questions, this research investigated 458 Korean firms` financial data from 1994 to 2004. It has been discovered that small profit reporting firms in distribution of earnings per share are related to significant positive earnings management, which is indicative of the firms` earnings management for loss avoidance. However, the properties of accounting treatment of small profit reporting firms in distribution of E/P are considerably different from those of small profit reporting firms in distribution of EPS. The firms reporting small profit in distribution of E/P are related to conservative accounting rather than earnings management for loss avoidance. Because small profit reporting does not always means earnings management of loss avoidance but also relates to conservative accounting, there is no obvious reason to conclude that the shapes are the evidence of earnings management. Financial statement users should consider two-sided attributes of small profit reporting in the interpretation of small profit reporting.