Analysts’ Motives for Rounding EPS Forecasts

49 Pages Posted: 12 Mar 2008 Last revised: 14 Jul 2012

See all articles by Patricia Dechow

Patricia Dechow

USC Marshall School of Business

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Date Written: May 1, 2012

Abstract

We investigate analysts’ motives for rounding annual EPS forecasts (placing a zero or five in the penny location of the forecast). We first show that an intuitive reason for analysts to engage in rounding is in circumstances where the penny location of the forecast is of less economic significance. By rounding, analysts reveal that their forecasts are not intended to be precise to the penny. We also show that analyst incentives impact the likelihood of rounding. Specifically, we predict that analysts will exert less effort forecasting earnings for firms that generate less brokerage or investment banking business since such firms create less value for the analysts’ employers. As a consequence of this lack of effort and attention, the analyst will be more uncertain about the penny digit of the forecast and so will round. Our results are consistent with this prediction. One implication of our findings is that a rounded forecast is a simple and easily observable proxy for a more noisy measure of the market’s expectation of earnings. Consistent with this implication, we show that rounded forecasts bias down earnings response coefficients at earnings announcements.

JEL Classification: G12, G14, G29, M41

Suggested Citation

Dechow, Patricia and You, Haifeng, Analysts’ Motives for Rounding EPS Forecasts (May 1, 2012). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1105262 or http://dx.doi.org/10.2139/ssrn.1105262

Patricia Dechow (Contact Author)

USC Marshall School of Business ( email )

Los Angeles, CA 90089-0441
United States

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

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