The Power of Numbers: Base-Ten Threshold Effects in Reported Revenue
59 Pages Posted: 31 Mar 2016 Last revised: 16 May 2022
Date Written: January 4, 2022
We show that managers have a propensity to disproportionately report total revenues just above base-ten thresholds (e.g., ten million, thirty million, one billion) and examine motives for and consequences of this behavior. We document that base-ten thresholds are unusually prevalent in revenue targets set in executive compensation contracts, analyst forecasts, and management forecasts. We also show that pressure to beat these targets provides one explanation for the base-ten bias in reported revenues. However, these incentive effects do not offer a complete explanation because base-ten threshold-beating is observed even in the absence of these explicit targets. We further find that when firms beat a base-ten threshold for the first time, they experience increases in news coverage, institutional ownership, liquidity, and analyst following, even after controlling for whether they have beaten other common benchmarks. These results suggest that managers also beat base-ten thresholds in order to increase their overall visibility.
Keywords: Base-Ten Thresholds, Revenue Management, Firm Visibility, Target-Beating
JEL Classification: G10, M21, M41
Suggested Citation: Suggested Citation