Quadrophobia: Strategic Rounding of EPS Data

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)

Joseph Grundfest

Stanford University Law School

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

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

Nadya Malenko (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
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 University 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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