Quadrophobia: Strategic Rounding of EPS Data
Stanford University Law School
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
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, M43working papers series
Date posted: September 18, 2009 ; Last revised: December 14, 2011
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