Quadrophobia: Strategic Rounding of EPS Data

Malenko, Nadya; Grundfest, Joseph; Shen, Yao

doi:10.2139/ssrn.1474668

Quadrophobia: Strategic Rounding of EPS Data

Rock Center for Corporate Governance at Stanford University Working Paper No. 65

Stanford Law and Economics Olin Working Paper No. 388

47 Pages Posted: 18 Sep 2009 Last revised: 10 Aug 2020

See all articles by Nadya Malenko

Nadya Malenko

University of Michigan, Stephen M. Ross School of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Yao Shen

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

Date Written: August 9, 2020

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 and persistent, and successfully predicts future restatements, SEC enforcement actions, and class action litigation. It is more pronounced in "street" earnings and increases (declines) as firms gain (lose) analyst coverage. Quadrophobia is especially strong when the result of rounding 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: Suggested Citation

Malenko, Nadya and Grundfest, Joseph A. and Shen, Yao, Quadrophobia: Strategic Rounding of EPS Data (August 9, 2020). 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