The Power of Numbers: Base-Ten Threshold Effects in Reported Revenue
67 Pages Posted: 31 Mar 2016 Last revised: 8 May 2019
Date Written: May 3, 2019
We provide evidence that managers have a revealed preference for reporting total revenue numbers just above base-ten thresholds (i.e., “round” numbers) of the form N × 10^K. We find that firms that beat a base-ten threshold for the first time experience an increase in visibility across a wide range of channels. Specifically, news coverage, liquidity, analyst following, and institutional ownership increase in the years immediately after a threshold is attained. We also provide evidence that some firms engage in costly and unsustainable actions in order to beat base-ten revenue thresholds, with positive revenue management, temporarily high revenue growth, and subsequent drops in profitability and abnormal returns. Our results have broader implications for the literature on target-beating because they document the presence and consequences of target-beating in a setting where the targets are exogenously determined and not confounded with underlying economic processes.
Keywords: Base-Ten Thresholds, Revenue Quality, News Coverage, Target-Beating
JEL Classification: G10, M21, M41, K20
Suggested Citation: Suggested Citation