The Power of Numbers: Base-Ten Threshold Effects in Reported Revenue

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See all articles by Derrald Stice

Derrald Stice

The University of Hong Kong - School of Business

Earl Stice

Brigham Young University; Nazarbayev University

Han Stice

The Chinese University of Hong Kong

Lorien Stice-Lawrence

University of Southern California - Marshall School of Business

Date Written: May 25, 2022

Abstract

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. Focusing on base-ten thresholds in revenues is important because, despite being unusually prevalent in revenue targets set in executive compensation contracts, analyst forecasts, and management forecasts, they have not been previously explored. 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 firms’ overall visibility. Overall, we show that a preference for base-ten numbers, which have no inherent economic meaning, has a measurable effect on the actions of market participants. These results open the door to a new range of managerial targets previously unexplored.

Keywords: base-ten thresholds, revenue management, firm visibility, target-beating

Suggested Citation

Stice, Derrald and Stice, Earl and Stice, Han and Stice-Lawrence, Lorien, The Power of Numbers: Base-Ten Threshold Effects in Reported Revenue (May 25, 2022). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=

Derrald Stice (Contact Author)

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Earl Stice

Brigham Young University ( email )

Provo, UT 84602
United States

Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

Han Stice

The Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong

Lorien Stice-Lawrence

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

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