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For Some Firms, A Case Of 'Quadrophobia'

Publication Date: 
February 14, 2010
The Wall Street Journal
Scott Thurm

Professor Joseph Grundfest is quoted from a study suggesting that companies may tweak quarterly earnings to match investor expectations by rounding up earnings-per-share figures to the next tenth of a cent. Scott Thurm of the New York Times reports:

A new study provides further evidence suggesting many companies tweak quarterly earnings to meet investor expectations, and the companies that adjust most often are more likely to restate earnings or be charged with accounting violations.

The study, which examined nearly half a million earnings reports over a 27-year period, reached its conclusion by going beyond the standard per-share earnings results that are reported in pennies and analyzing the numbers down to the 10th of a cent.


"Managements will exercise accounting discretion to try to make their numbers look better for Wall Street … in a number of subtle ways," said Joseph Grundfest, one of the study's authors. Mr. Grundfest is a law professor at Stanford University and a former member of the Securities and Exchange Commission.

Mr. Grundfest and co-author Nadya Malenko, a doctoral candidate at the Stanford Graduate School of Business, said the accounting maneuvers may be legal, even when they have the effect of boosting reported earnings per share. Most of the tactics involve judgment calls, such as the value of inventory or the amount that should be set aside for loans that won't be repaid. The Securities and Exchange Commission declined to comment.

The authors' conclusions rest on a simple piece of statistical analysis. When they ran the earnings-per-share numbers down to a 10th of a cent, they found that the number "4" appeared less often in the 10ths place than any other digit, and significantly less often than would be expected by chance. They dub the effect "quadrophobia."