Abstract

http://ssrn.com/abstract=1474668
 
 

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Citations (3)



 


 



Quadrophobia: Strategic Rounding of EPS Data


Joseph Grundfest


Stanford University Law School

Nadya Malenko


Boston College - Carroll School of Management

December 14, 2011

Rock Center for Corporate Governance at Stanford University Working Paper No. 65
Stanford Law and Economics Olin Working Paper No. 388

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

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Date posted: September 18, 2009 ; Last revised: December 14, 2011

Suggested Citation

Grundfest, Joseph and Malenko, Nadya, Quadrophobia: Strategic Rounding of EPS Data (December 14, 2011). Rock Center for Corporate Governance at Stanford University Working Paper No. 65; Stanford Law and Economics Olin Working Paper No. 388. Available at SSRN: http://ssrn.com/abstract=1474668 or http://dx.doi.org/10.2139/ssrn.1474668

Contact Information

Joseph A. Grundfest (Contact Author)
Stanford University Law School ( email )
559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-0458 (Phone)
650-723-8229 (Fax)
Nadya Malenko
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
HOME PAGE: http://www2.bc.edu/nadya-malenko/
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