Rounding-Up in Reported Eps, Behavioral Thresholds, and Earnings Management

Das, Somnath; Zhang, Huai

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Rounding-Up in Reported Eps, Behavioral Thresholds, and Earnings Management

Journal of Accounting and Economics, Vol. 35, No. 1, pp. 31-50, April 2003

34 Pages Posted: 29 Jan 2003 Last revised: 14 Jul 2010

See all articles by Somnath Das

Huai Zhang

Nanyang Business School, Nanyang Technological University

Abstract

Reported earnings per share (EPS) are frequently rounded to the nearest cent. This paper provides evidence that firms manipulate earnings so that they can round-up and report one more cent of EPS. Specifically, we examine the digit immediately right of the decimal in the calculated earnings per share number expressed in cents. Evidence is presented that firms are more likely to round-up when managers ex-ante expect rounding-up to meet analysts' forecasts, report positive profits, or sustain recent performance. Further investigation provides evidence that working capital accruals are used to round-up EPS.

Keywords: behavioral thresholds, earnings management, earnings per share, rounding

JEL Classification: M41, M43, G14

Suggested Citation: Suggested Citation

Das, Somnath and Zhang, Huai, Rounding-Up in Reported Eps, Behavioral Thresholds, and Earnings Management. Journal of Accounting and Economics, Vol. 35, No. 1, pp. 31-50, April 2003, Available at SSRN: https://ssrn.com/abstract=372344