Round Number Reference Points and Irregular Patterns in Reported Gross Margins

74 Pages Posted: 24 Nov 2020 Last revised: 1 Feb 2023

See all articles by Matthew C. Cedergren

Matthew C. Cedergren

Santa Clara University

Valerie Li

San Diego State University

Date Written: January 28, 2023

Abstract

We find irregular patterns in the distribution of firms’ reported quarterly gross margin percentages. Specifically, there is significant bunching around percentage integers that are highly round (e.g., multiples of 10, such as 30%, 40%, etc.) or are neatly “divisible” (e.g., 25%, 75%) compared to what would be predicted by counterfactual distributions. Further investigation reveals that highly round gross margin firms are smaller, exert higher effort, achieve higher productivity, have more difficult goals, and pay their CEOs with a higher portion of fixed income. We also find that highly round gross margins are associated with superior performance. Additionally, we do not find consistent evidence that highly round gross margin reference points are linked to external rewards. Collectively, our evidence is consistent with reference-dependent preferences for highly round gross margins likely being driven by intrinsic (rather than extrinsic) motivations.

Keywords: reference dependence; prospect theory; gross margins; goal setting

JEL Classification: M4, M41, G41

Suggested Citation

Cedergren, Matthew C. and Li, Valerie, Round Number Reference Points and Irregular Patterns in Reported Gross Margins (January 28, 2023). Available at SSRN: https://ssrn.com/abstract=3708609 or http://dx.doi.org/10.2139/ssrn.3708609

Matthew C. Cedergren (Contact Author)

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

Valerie Li

San Diego State University ( email )

San Diego, CA 92182
United States

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