The idea of kitchen sinking is to release bad news at the same time rather than ‘spreading’ out such announcements over an extended period of time. With all the bad news coming at the same time, companies may also take the chance to take a ‘big bath’, which is an earnings management technique where earnings are made to look worse than they are. While kitchen sinking is wrong per se, taking a big bath pushes beyond the boundaries of accounting subjectivity and is unethical.
1. Earnings forecast going to be revised lower anyway so might as well lower expectations more so make future years easier
2. Analysts/market going to write-off 2020 performance and focus on recovery
3. Drive down stock price for management to buy before the recovery; moral hazard due to information asymmetry as management knows things are not as bad as reported
Areas to look out for
1. Write-offs/Impairments/Provisions (banks’ loan loss