Quadrophobia: Strategic Rounding of EPS Data
Boston College - Carroll School of Management
Stanford University Law School
July 2, 2014
Rock Center for Corporate Governance at Stanford University Working Paper No. 65
Stanford Law and Economics Olin Working Paper No. 388
Earnings management to round up reported EPS causes under-representation of the number four in the first post-decimal digit of EPS data, or "quadrophobia." We develop a simple measure of earnings management based on a firm's history of quadrophobia. Quadrophobia is pervasive and persistent, and predicts future restatements, SEC enforcement actions, and class action litigation. Quadrophobia, even if the result of proper accounting practices, thus appears correlated with a propensity to engage in other problematic accounting practices. The incidence of quadrophobia increases (declines) when firms gain (lose) analyst coverage and is more pronounced in pro forma earnings in a manner consistent with capital market pressure causing strategic rounding.
Number of Pages in PDF File: 35
Keywords: earnings management, earnings per share, forensic accounting, analyst coverage, accounting restatements, SEC enforcement actions, class action securities fraud litigation
JEL Classification: G38, K22, M41
Date posted: September 18, 2009 ; Last revised: July 3, 2014
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