Numbers Games? A Natural Experiment Investigating Three (Ir)Regularities in Reported Earnings Per Share

33 Pages Posted: 26 Aug 2010

See all articles by Bjorn Jorgensen

Bjorn Jorgensen

London School of Economics & Political Science (LSE) - Department of Accounting and Finance

Yong Gyu Lee

Seoul National University

Steve Rock

University of Colorado at Boulder - Department of Accounting

Date Written: August 25, 2010

Abstract

We confirm the existence of three irregularities noted in prior research related to reported earnings per share (EPS). First, the unusual pattern in the second digit of reported EPS noted by Thomas (1989) that the second digit of EPS is more likely to be zero and five and less likely to be nine for profit firms while the pattern does not appear for loss firms. Second, the rounding pattern in (unreported) third decimals of EPS noted by Das and Zhang (2003) that the one tenth of a cent is more likely between five and nine for profit firms. Third, the threshold irregularity in EPS changes attributed to Degeorge et al. (1999) and related to Burgstahler and Dichev (1997), that zero changes and one-cent increases are over-represented and one-cent decreases are underrepresented, relative to expectations. Our study confirms that these patterns exist and enhances confidence in each reported irregularity’s validity by identifying matched pairs of firm-years immediately prior to the adoption of SFAS 128. We further extend prior research on EPS irregularities by conducting analysis to discern whether the second digit pattern appears to dominate the threshold irregularity or vice-versa.

Keywords: Earnings Management, EPS, Thresholds

JEL Classification: M41

Suggested Citation

Jorgensen, Bjorn N and Lee, Yong Gyu and Rock, Steven Karl, Numbers Games? A Natural Experiment Investigating Three (Ir)Regularities in Reported Earnings Per Share (August 25, 2010). Available at SSRN: https://ssrn.com/abstract=1665290 or http://dx.doi.org/10.2139/ssrn.1665290

Bjorn N Jorgensen (Contact Author)

London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )

Department of Accounting Room, OLD 2.17
Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.lse.ac.uk/accounting/people/bjorn-jorgensen

Yong Gyu Lee

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Steven Karl Rock

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States
303-735-5009 (Phone)
303-492-5962 (Fax)

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