THE USE OF GIFT CARD BREAKAGE AS AN EARNINGS MANAGEMENT TOOL

Gregory G. Kaufinger
Chris Neuenschwander
Anderson University
ABSTRACT
This study investigates the use of gift card breakage as an earnings management tool.
Results using a sample of publicly traded retail firms for the period 2005-2012 suggest that retail
firms use breakage to manage earnings and that a principal motivation behind this behavior is to
meet market analysts’ consensus Earnings Per Share (EPS) forecasts. The findings highlight the
need for bright-lines rules for breakage transactions and underscore the importance of
transparency and full disclosure by retail managers to avoid any appearance of earnings
management.