Quadrophobia: Strategic Rounding of EPS Data

Abstract:     
We hypothesize that earnings management causes quadrophobia, the under-representation of the number four in the first post-decimal digit of EPS data. We demonstrate that quadrophobia is pervasive, persistent, and follows economically rational patterns. Consistent with analyst coverage being a determinant of earnings management, quadrophobia increases (declines) when companies gain (lose) analyst coverage, and is more frequent when earnings are close to analyst forecasts. Persistent quadrophobes are more likely to restate financials and to be sued in SEC proceedings alleging accounting violations. Quadrophobia, even if itself legal, therefore appears to signal a propensity to engage in problematic accounting practices.

Number of Pages in PDF File: 64

Keywords: earnings management, earnings per share, forensic accounting, analyst coverage, earnings benchmarks, Sarbanes-Oxley Act, accounting restatements, SEC enforcement actions

JEL Classification: G34, G38, K22, M41, M43

working papers series