Quadrophobia: Strategic Rounding of EPS Data

59 Pages Posted: 18 Sep 2009 Last revised: 7 Jul 2022

See all articles by Nadya Malenko

Nadya Malenko

Boston College, Carroll School of Management; National Bureau of Economic Research (NBER); Finance Theory Group (FTG); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Joseph Grundfest

Stanford Law School

Yao Shen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: July 6, 2022

Abstract

Managers' incentives to round up reported EPS cause under-representation of the number four in the first post-decimal digit of EPS, or "quadrophobia." We develop a novel measure of aggressive financial reporting practices based on a firm's history of quadrophobia. Quadrophobia is pervasive, persistent, and successfully predicts future restatements, SEC enforcement actions, and class action litigation. It is more pronounced when executive compensation is more closely tied to the stock price and when the firm anticipates violating debt covenants. Quadrophobia is especially strong when rounding-up EPS allows firms to meet analyst expectations, and investors seem not to see through this behavior.

Keywords: financial reporting practices, earnings management, earnings per share, forensic accounting, analyst coverage, accounting restatements, SEC enforcement actions, class action securities fraud litigation

JEL Classification: G24, G30, G38, K22, M41

Suggested Citation

Malenko, Nadya and Grundfest, Joseph A. and Shen, Yao, Quadrophobia: Strategic Rounding of EPS Data (July 6, 2022). Journal of Financial and Quantitative Analysis, forthcoming, Rock Center for Corporate Governance at Stanford University Working Paper No. 65, Stanford Law and Economics Olin Working Paper No. 388, Available at SSRN: https://ssrn.com/abstract=1474668 or http://dx.doi.org/10.2139/ssrn.1474668

Nadya Malenko (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Finance Theory Group (FTG) ( email )

United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Joseph A. Grundfest

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-0458 (Phone)
650-723-8229 (Fax)

Yao Shen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

55 Lexington Ave
New York, NY 10010
United States

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